{"id":208479,"date":"2025-05-08T09:01:00","date_gmt":"2025-05-08T16:01:00","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=208479"},"modified":"2025-05-05T17:01:24","modified_gmt":"2025-05-06T00:01:24","slug":"how-purchase-order-financing-works","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/how-purchase-order-financing-works\/","title":{"rendered":"How Purchase Order Financing Works"},"content":{"rendered":"

Purchase order financing, also known as PO financing, is when a third party loans a business the money to increase production and meet the needs of a customer in exchange for payment with interest once the customer pays. It is similar to a <\/span>small business loan<\/span><\/a> in that you can get the financing you need to buy raw materials or increase inventory and production, but the approval times are faster, you only make one payment with interest vs. multiple, and it likely costs you less money overall.<\/span>\u00a0<\/span><\/p>\n

PO financing may require a hard pull just like taking a business loan from a traditional or alternative lender, so it does have a temporary negative impact on your business credit score. If this is a concern for you and you have the time, look for other lending companies and ask them if they do hard inquiries as part of the application process. Or see if a current supplier to your company would be interested in being the lender.<\/span>\u00a0<\/span><\/p>\n

Purchase order financing is the total amount you borrow with interest, which should be lower than the profit margin you sell for if making a profit on the sale is important to you. Otherwise, you\u2019ll be doing the work to break even or come in at a loss.\u00a0<\/span>\u00a0<\/span><\/p>\n

One exception could be securing a larger contract for the long run, where the first transaction is meant to break even and you can finance the next orders without interest payments. This situation lets you gradually increase profits over the length of the contract with the new or existing customer.<\/span>\u00a0<\/span><\/p>\n

If you borrow $10,000 to fulfill an order for $100,000 and it has a 10% profit margin but a 2% interest rate, you\u2019re now at a loss of 2% or $200.\u00a0<\/span>\u00a0<\/span><\/p>\n

$10,000 profit<\/span>
\n– $10,000 borrowed and paid back<\/span>
\n– $200 in interest payments <\/span>
\n= -$200 as a loss<\/span>\u00a0<\/span><\/p>\n

If you had a 14% profit margin, you\u2019d be profitable by $200 in the scenario above on the first sale.<\/span>\u00a0<\/span><\/p>\n

Below, you\u2019ll learn how the process of purchase order financing works, when it makes sense, when to avoid using it, and alternatives to let you take new contracts and grow your business.\u00a0<\/span>\u00a0<\/span><\/p>\n

The Purchase Order Financing Process<\/span>\u00a0<\/span><\/h2>\n

Purchase order financing has a 5-step process:<\/span><\/p>\n

    \n
  1. A customer places a purchase order with a business.<\/span>\u00a0<\/span><\/li>\n
  2. The company with the purchase order finds a lender, which could be a traditional bank, alternative lender, or a supplier, and asks if they\u2019ll fund the production or inventory costs.<\/span>\u00a0<\/span><\/li>\n
  3. The lender finances the company so they can meet the obligations from the contract.<\/span>\u00a0<\/span><\/li>\n
  4. The customer pays for the order, once delivered.<\/span>\u00a0<\/span><\/li>\n
  5. The company pays the lender back with interest.<\/span>\u00a0<\/span><\/li>\n<\/ol>\n

    It is an easy process and can help you build a strong bond with suppliers as they now have multiple ways to make money with you including selling directly to your business and loaning you money at reasonable interest rates. You can grow your business and, as your business grows, so does theirs.\u00a0<\/span>\u00a0<\/span><\/p>\n

    When PO Financing Makes Sense<\/span>\u00a0<\/span><\/h2>\n

    Purchase order financing is a good idea when:<\/span>\u00a0<\/span><\/p>\n