What is Purchase Order Financing?
Purchase order financing is funding that pays a brand's supplier to produce a confirmed customer order, repaid when that customer pays. The brand lands an order larger than its cash can cover, the financing company pays the factory, the goods ship, the brand invoices the customer, and the customer's payment goes to the financing company, which deducts its fee and sends the rest to the brand.
How Purchase Order Financing Works for an Ecommerce Brand
It is a wholesale tool. The order has to come from a business customer, such as a distributor, a group of specialty stores or a large online wholesale account, and the purchase order has to be firm. Lenders commonly fund most or all of the supplier's cost for that order, and the fee runs for each period until the customer pays, so a customer on 60-day terms costs more to finance than one on 30.
Because the debt is repaid by one customer paying one invoice, it does not fit DTC or marketplace sales, where thousands of small orders settle through payouts. For stock the brand will sell to shoppers over months, inventory financing or a line of credit is the usual instrument.
What Lenders Look At
A purchase order lender underwrites three parties. It checks the customer's credit and payment record, since the customer repays the advance. It checks the supplier's ability to deliver on time and to specification, since a late or rejected shipment means no invoice. And it checks the margin on the order, since its fee comes out of the gap between the order value and the supplier's cost. Many lenders set a minimum order size and a minimum gross margin on the deal. Many require the goods to ship straight from the factory to the customer, which rules out orders the brand must kit or label first.
Further Reading
Inventory Financing: How It Works, What It Costs, and How It Compares to PO Financing
Formula
Financing Fee = Supplier Cost × Fee per 30 Days × Number of 30-Day Periods Outstanding
Amount Remitted to the Brand = Customer Payment − Supplier Cost Advanced − Financing Fee
Example
A brand receives a $120,000 order from a distributor on 60-day payment terms. The supplier's cost to produce it is $60,000, and the factory needs 30 days to make and ship the goods. A purchase order lender pays the factory $60,000 at 3% per 30 days.
- Days outstanding: 30 to produce and ship + 60 for the customer to pay = 90 days, three periods
- Financing fee: $60,000 × 3% × 3 = $5,400
- The customer pays $120,000 to the lender
- The lender keeps $60,000 + $5,400 = $65,400 and remits $54,600 to the brand
Gross profit on the order is $60,000 ($120,000 − $60,000), so the brand keeps $54,600 after financing on an order it could not have filled from its own cash. As a simple annual rate, 3% per 30 days is about 36% (3% × 12), which is why the fee should be weighed against the profit on the specific order.
General education only, not legal, tax or investment advice; how a term applies to your brand depends on your own documents and advisers.