Purchase order finance: how to fill a big order you can't yet afford to supply

Purchase order finance is for the moment every growing business both wants and dreads: a customer places an order much bigger than you’ve ever handled, and you can’t pay your supplier to fill it. A purchase order funder pays the supplier for you, the goods are delivered, your customer pays, and the funder takes back its money plus fees. You keep the margin and the relationship, without turning the order down or giving away a slice of the business.

It’s a narrow product with a specific job. Used for the right order, it’s one of the few ways to fund a deal based mostly on someone else’s creditworthiness. Used for the wrong one, it gets expensive quickly.

How does purchase order finance work?

1. You receive a confirmed order from a business or government customer.
2. You get a supplier quote for the goods needed to fill it.
3. The funder checks both sides: your customer’s ability to pay and your supplier’s ability to deliver on time and to spec.
4. The funder pays the supplier directly, sometimes via a letter of credit for overseas suppliers.
5. The goods are delivered to your customer, who accepts them.
6. You invoice the customer. At this point the deal often rolls into invoice finance, which repays the PO funder.
7. Your customer pays, the invoice facility is cleared, and the remaining margin comes back to you.

The cleaner the chain from supplier to customer, the more comfortable a funder will be.

When does purchase order finance make sense?

It’s strongest when the order is real, the margin is solid and the goods pass through with little change. Common examples:

• Distributors and wholesalers landing a first order from a major chain.
• Resellers of equipment, uniforms or consumables winning a government or corporate tender.
• Importers filling a confirmed order from a single large buyer (see import finance for the shipping side).
• Seasonal suppliers where one customer’s order dwarfs the rest of the year.

It’s weaker when you’d need to manufacture or heavily customise the goods, when margins are thin, when the customer can cancel easily, or when the supplier is new and untested.

How does PO finance compare with its neighbours?

	Purchase order finance	Invoice finance	Inventory finance
Stage funded	Before goods are supplied	After goods are delivered and invoiced	While stock is held
Main security	The order and the goods	The unpaid invoice	The stock itself
Lender relies on	Customer and supplier	Customer	Value and saleability of stock
Typical repayment	From invoice finance or customer payment	Customer payment	As stock sells

Many businesses use these in sequence: PO finance gets the goods made and delivered, invoice finance bridges the payment terms, and inventory finance carries any stock held between orders.

What do lenders check before funding an order?

• The customer. Size, credit history and how reliably it pays suppliers.
• The order itself. Is it in writing, firm and non-cancellable? Are delivery dates, specifications and acceptance terms clear?
• The supplier. Track record, capacity to deliver on time, and whether it will deal directly with the funder.
• Your margin. There must be room to pay the funder’s fees and still make the deal worthwhile.
• Your experience. Have you delivered similar products before, even at smaller volumes?
• Security and priority. Who else has a claim over the goods or your business assets.

That last point connects to the PPSR. Suppliers who sell on retention-of-title terms can protect their claim by registering it, and the PPSR’s guidance for wholesalers explains that an unregistered supplier risks being treated as an unsecured creditor if its customer becomes insolvent. A funder that pays your supplier may register its own interest in the goods as a purchase money security interest, which can give priority over earlier registrations. For inventory, the PPSR says that registration must be made before the grantor takes possession of the goods, so the funder will want its paperwork done before delivery.

If you’re holding an order you’re not sure you can fill, talk to us about funding it before you answer the customer.

What does purchase order finance cost?

Because the funder carries the risk of both the supplier and the customer, it usually costs more than invoice finance or a secured loan. Costs typically include:

• A funding fee based on the amount paid to the supplier and how long it’s outstanding, often charged in monthly blocks.
• Transaction or due diligence fees for checking the customer, supplier and order.
• Letter of credit and foreign exchange costs if the supplier is overseas.
• The cost of the follow-on invoice facility, if the deal rolls into one.

Every arrangement is priced on its own facts. A useful rule of thumb is to work out the profit on the order after all funding costs, then ask whether the deal is still worth doing. For many businesses, a first big order is worth it for the customer relationship alone.

Illustrative example: a workwear distributor

Illustrative example: a small workwear distributor usually sells to local trades businesses. It wins a written order from a national facilities company for branded uniforms worth $250k, with delivery in eight weeks and 45-day payment terms. Its regular supplier can make the uniforms but wants $150k up front.

A PO funder confirms the order and the facilities company’s payment history, pays the supplier directly and registers its interest in the goods. The uniforms are delivered and accepted, the distributor invoices, and an invoice facility repays the PO funder. When the facilities company pays, the invoice facility is cleared and the margin flows back to the distributor.

When should you look at something else?

• The order is small relative to your turnover: a short-term business loan or working capital loan may be quicker and cheaper. Unsecured options for trading businesses are typically $5k to $500k.
• You manufacture the product: look at inventory or equipment finance.
• You own property: a secured business loan from $20k to $5m can fund the order with fewer moving parts.

The secured or unsecured tool is a quick way to see which way your situation leans.

Won a big order? Let’s see if you can fund it

Saying yes to the order that changes your business shouldn’t depend on how much cash is in the account this week. Send us the basics: the order size, who the customer is, your supplier’s terms and when delivery is due. It takes about 60 seconds, and there’s no credit check when you first get in touch. Your enquiry isn’t fired off to a stack of lenders, so your phone stays quiet except for us. A real person reviews the deal and calls you. Fill the form in as accurately as you can, so we can line up the right structure first time.

Check if your order can be funded →