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Purchase order financing PO financing
Also called PO funding, purchase order funding.
Funding that pays a supplier to produce or ship goods against a confirmed customer purchase order, repaid when the resulting invoice is collected.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
The sequence is fixed. A creditworthy customer issues a purchase order. The funder verifies it and the supplier, then pays the supplier directly or issues a letter of credit in the supplier's favour. Goods are produced and shipped. The business invoices the customer. The invoice is collected - very often by a factor working alongside the PO funder - and the PO funder is repaid out of the proceeds, with the remainder released to the business.
It suits finished-goods resale with a clear margin: the funder needs the gross margin on the order to cover its fee and leave the business whole. It fits badly where the business manufactures from raw materials, where the goods are custom and unsaleable elsewhere, or where the order is for services.
Because the funder is paying a supplier rather than lending working capital, the business's own credit matters less than the customer's creditworthiness and the supplier's reliability.
Where this one catches people
It funds your supplier, not your bank account. PO finance almost never puts usable cash in your hands for payroll, rent or overhead - it pays for goods, and you are charged a fee on money you never controlled. Businesses that approach it as general working capital are consistently disappointed by what actually happens at funding.
Worked through
Illustration. A $250,000 order with a supplier cost of $175,000, a gross margin of $75,000. The PO funder pays the supplier $175,000. Goods ship, the invoice issues, and a factor advances against it so the business has cash before collection.
When the customer pays $250,000, the PO funder takes back $175,000 plus its fee, the factor takes its fee and the advance, and what reaches the business is the margin less both sets of charges. A thin-margin order can consume the entire profit in fees, which is why funders test gross margin before anything else.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
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Purchase order financing — common questions
What does purchase order financing mean?
Funding that pays a supplier to produce or ship goods against a confirmed customer purchase order, repaid when the resulting invoice is collected.
Where does purchase order financing catch people out?
It funds your supplier, not your bank account. PO finance almost never puts usable cash in your hands for payroll, rent or overhead - it pays for goods, and you are charged a fee on money you never controlled. Businesses that approach it as general working capital are consistently disappointed by what actually happens at funding.
Is purchase order financing the same as an interest rate?
Purchase order financing is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does purchase order financing apply to?
Working Capital, Invoice Financing, Asset-Based Lending.
Is there a worked example of purchase order financing?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside purchase order financing?
Advance rate, Invoice factoring, Net 30, Receivable, Reserve.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.