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Purchase order finance

Using your purchase orders to secure funding helps your business supply customers while increasing production capacity.

Updated

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.

The purchase order finance process

  1. You receive a purchase order from your customer
  2. You apply for funding from a lender using the purchase order as collateral
  3. The lender contacts the customer to verify the purchase order
  4. The lender then pays your supplier, who ships the finished goods to your customer
  5. The customer pays the lender
  6. The lender transfers any profit to you

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?

  • Unsecured financing. Besides the purchase order itself, your business doesn't have to put up security for this loan.
  • Safe. Lenders cover all bases before approving financing, including validating the authenticity of your purchase order with suppliers and customers. The funding goes straight to the supplier who sends the finished goods to your customers.
  • Simple to procure. You can apply for purchase order financing online. Approval is fast so that you can supply your customers as quickly as possible.
  • Short-term.This is a short-term loan designed to resolve temporary cash flow problems. If you have more serious financial issues, a different loan type might be more suitable for you.
  • Finished goods only. Purchase order finance can be used for finished goods only.

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.

Common questions about financing purchase orders

Who will lend money against a purchase order?

You will most likely get funding from smaller, online lenders rather than traditional banks. Lending criteria is more flexible and they're willing to lend smaller amounts to small- and medium-sized businesses.

What are the criteria that my business needs to fulfill?

Most lenders require that your business isn't encumbered by too many existing loans and that it doesn't have legal or tax issues. Your business should also have relatively good profit margins and work with reputable commercial partners. In most cases, the purchase order should be non-cancellable and for finished goods only.

Will I get funding equal to the whole purchase order?

This differs from lender to lender. Some will lend 70% of the total purchase order, while others will lend as much as 90%.

Compare other business loan options

Data indicated here is updated regularly
Name Product Min. Loan Amount Max. Loan Amount Loan Term Upfront Fee Filter Values
Prospa Business Loan
$5,000
300,000
3 months to 3 years
3% origination fee
Small business loans are available from $5,000 - $300,000 on terms of up to 3 years. At least six months trading history and a monthly turnover from $6,000 is necessary.
OnDeck Business Loans
$10,000
250,000
6 months to 2 years
3% of loan amount
Apply for up to $250,000 and receive your approved funds in one business day. Minimum annual turnover of $100,000 and 1 year of trading history required.
Max Funding Unsecured Business Loan
$2,000
300,000
1 month to 1 year
$0 application fee
An unsecured business loan from $2,000 that offers convenient pre-approval and no early repayment fees.
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If your business is struggling to overcome cash flow problems and has outstanding invoices, invoice financing could be an option to consider. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.

Data indicated here is updated regularly
Name Product Min. Loan Amount Max. Loan Amount Loan Term Upfront Fee Filter Values
Timelio Invoice Finance
$10,000
100,000,000
Up to 4 months
$0
Get up to 100% of the value of your invoices without having to wait for customer payments, and with no minimum turnover or operating history required.
Scottish Pacific Invoice Finance
$200,000
100,000,000
From 1 year
No set amount
Improve your business cash flow by financing your outstanding invoices. No minimum trading history required, but minimum 12 - month term and $200,000 in invoices.
Key Factors Selective Invoice Finance
$0
3,000,000
From 1 day
$0
Get access to funds in 4 hours. Pay as you use with no minimum, up to 80% advance on invoices, no lock-in contract and transparent fees.
Note: Must have annual sales turnover between $500,000 and $30 million.
BCashflow Positive Invoice Finance
$100,000
3,000,000
From 1 year
$0
Get funded up to 90% of the invoice in 4 hours. No hidden fees, 1.8% of the invoice for the first 30 days, and 0.06% per day after. Note: Suitable for businesses with monthly turnover between $100,000 and $3,000,000.
Scottish Pacific Selective Invoice Finance
$10,000
1,000,000
1 to 3 months
$500
Finance your unpaid invoices on demand with terms of 1 - 3 months. 95% of invoice is paid upfront, with no minimum trading history required.
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Compare up to 4 providers

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