Purchase order finance

If your business is having trouble filling orders, you may want to consider using purchase orders as collateral to pay suppliers. Referred to as purchase order financing, it's a popular option for small- and medium-sized business owners because it can be a short-term solution to temporary cash flow problems.

This guide will take you through what you need to know about purchase order financing.

How does purchase order financing work?

Purchase order financing can be the ideal solution for resolving cash flow problems and getting outstanding orders filled. Using the purchase order as security, the lender will pay your suppliers on your behalf. Once the suppliers have delivered the finished goods to your customer, the customer will pay the lender and you will collect the profit. This way, your business can continue to fill orders, take on more work and ultimately expand and develop its capacity.

How you can compare purchase order financing

Here are some factors to consider when comparing purchase order finance loans:

• Lending criteria. Purchase order finance is usually offered by alternative lenders where the lending criteria are more flexible than those of banks.
• Verification. The lender takes a risk financing your purchase order, so the authenticity and validity of the purchase order will be verified with the customer and supplier.
• Short-term. This is a short-term solution to cash flow problems, meant to help bridge the gap between receiving an order and collecting the profit once the customer pays. If you require a larger loan you may want to explore other loan options that may be better suited to your needs.
• Maximum amounts. This depends on the lender, the size of your purchase order and your business's capacity to fill the order. Some lenders set minimum and maximum loan amounts, so do some research based on the size of your order.
• Local and overseas suppliers. If your suppliers or customers are overseas, make sure that the lender is aware of this and will agree to provide finance.

What are the benefits and drawbacks?

Things to consider before you apply

Make sure you're aware of the following pitfalls before you apply:

• Not knowing your supplier. Too many times businesses conduct transactions with shady suppliers only to be exposed when (and if) the shipment arrives. Make sure you know exactly who you're dealing with. A good way to avoid problems is to have a trading partner overseas to help you monitor letters of credit and properly inspect your shipments.
• Borrowing at a high cost. Make sure you're well-aware of all the costs associated with your loan. This includes the type of interest rate being applied (variable or fixed) and how it will be calculated. Also, be aware of all fees, including one-off and ongoing fees, and make sure you compare all options between lenders rather than jumping on board with the first lender you like.

Is there anything to avoid?

• Product inspection. Once delivered, the customer will do an inspection of the finished product. It's imperative that the order is correct; a delivery mistake reflects poorly on both your business and the lender.
• Risk. Before applying for finance, make sure that your business can fill the order. If you can't meet the obligation, you might have difficulty being approved for a loan in the future.

FAQs about financing purchase orders

• Can I use purchase order finance to pay international suppliers?

  Yes, most Australian purchase order finance providers facilitate payments to overseas suppliers in multiple currencies. This is a common solution for Australian importers who need to pay manufacturers in countries like China or Vietnam before goods are shipped.

• Do I need to provide real estate as security for purchase order finance?

  No, purchase order finance is typically a non-property-backed facility that does not require you to use your home or commercial premises as collateral. The lender treats the purchase order itself and the resulting accounts receivable as the primary security for the funding.

• Does the lender pay the supplier directly or do I receive the funds?

  The lender pays your supplier directly for the cost of the goods or raw materials. This ensures the supplier is satisfied and production can begin immediately, with the lender later recouping the funds when your customer pays their invoice.

• Can a new startup qualify for purchase order finance?

  Yes, startups can often qualify for purchase order finance if they have a confirmed order from a creditworthy customer. Lenders focus more on the credit strength of the end customer (such as a major retailer or government agency) and the reliability of the supplier than on the startup's own trading history.

• What are the typical costs associated with purchase order finance in Australia?

  Costs generally range between 1% and 5% of the total purchase order value for the first 30 days of funding. Fees are often structured as a discount rate or a flat percentage of the order value plus a monthly facility fee for keeping the account active.

• Will my customer know that I am using purchase order finance?

  Yes, your customer will typically be aware because they are usually required to acknowledge the purchase order or pay the final invoice into a designated account controlled by the lender. This transparency is a standard part of the verification process to ensure the transaction is legitimate.

Picture: Shutterstock

Written by

Elizabeth Barry

Journalist

Elizabeth Barry is an experienced journalist with over 10 years of expertise in personal finance, contributing to outlets like the ABC, Sydney Morning Herald, and 7News. She holds a Master of Arts in Creative Writing and a Bachelor of Arts in Communication from the University of Technology Sydney, and has earned multiple award nominations, including a Highly Commended recognition at the 2017 Lizzies. Elizabeth began her career at Finder in 2013, progressing through roles to become Lead Editor, where she oversaw a wide range of personal finance coverage until 2024. See full bio

Elizabeth's expertise

Elizabeth has written 185 Finder guides across topics including:

• Banking
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