Purchase Order Financing: How It Pays Your Supplier and What It Costs

How purchase order financing works, step by step

You receive a purchase order from a business or government customer, and your supplier quotes the cost to produce or ship the goods. You submit both to the PO funder, along with your supplier’s terms and your customer’s payment history. The funder checks that the order is firm and non-cancellable, that the supplier can deliver to specification, and that the customer is good for the money. If it approves, it pays the supplier, either by wiring a deposit and balance or by opening a letter of credit in the supplier’s favor.

The supplier ships, often straight to your customer. When delivery is confirmed you issue the invoice. At that point the transaction becomes a receivable, and the PO funder needs to be paid. Usually a factoring company buys the invoice and advances most of its value, which pays the PO funder’s outlay and fees. When the customer pays the factor on its normal terms, the factor releases the remainder to you, minus its own fee. Your profit arrives in two pieces: part at invoicing, the rest at final payment.

• 1. Customer issues a firm purchase order
• 2. Supplier quotes cost and lead time
• 3. PO funder verifies customer, supplier and order
• 4. Funder pays the supplier by wire or letter of credit
• 5. Goods ship and delivery is confirmed
• 6. You invoice; a factor advances against the invoice and pays off the PO funder
• 7. Customer pays the factor; the factor releases the balance to you, minus its fee

The gross-margin requirement

Because the funder pays for all or most of the goods and takes its fee out of the margin, the margin is the main underwriting number. Published minimums vary: some funders accept orders around 10 percent, while many look for 20 percent or more, and thin-margin deals are often declined because fees, a shipping delay and a slow customer can consume the whole profit. Funders calculate margin as the sale price on the purchase order minus the supplier’s landed cost, including freight, duties and any inspection fees.

A quick self-test: multiply the expected number of 30-day periods from supplier payment to customer payment by a fee of about 3 percent, and compare the result with your margin. If financing would take more than half the gross profit, the deal is usually worth renegotiating with the supplier or customer before applying, for example with a supplier deposit of 30 percent instead of 50, or shorter customer terms.

What PO financing costs

As of 2026, PO funders typically publish fees of about 1.5 to 6 percent of the amount they fund for each 30 days it is outstanding, with many quoting around 3 percent. Many charge a full first 30 days, then smaller increments for each 10 or 15 days after that, so a transaction that runs 35 days can cost more than a straight daily proration would suggest. Some add due-diligence, letter-of-credit, wire or inspection fees, and international transactions usually cost more than domestic ones.

The factoring step that pays off the PO funder has its own fee, priced on the invoice and the days until your customer pays, so the true cost of a transaction is the PO fee plus the factoring fee. Ask each funder for a written fee schedule covering the first 30 days, each later increment, every third-party charge, and what happens if the supplier ships late or the customer rejects part of the shipment.

Worked example: a $248,600 order

Hypothetical. A housewares distributor wins a $248,600 purchase order from a regional grocery chain on 40-day terms. The overseas supplier’s landed cost is $171,500, a gross margin of 31 percent. The PO funder pays the supplier and charges 3 percent for the first 30 days and 1 percent per 10 days after. Goods are delivered and invoiced on day 35. A factor then advances 85 percent of the invoice and charges 2 percent per 30 days, prorated. Illustrative only, not an offer.

The PO fee is $6,860 and the factoring fee about $6,629, so financing costs about $13,490, or 17.5 percent of the gross profit. The distributor receives $32,950 on day 35 and about $30,661 when the chain pays, a total of about $63,611, or 25.6 percent of the sale. Had the same order carried only a 12 percent margin, the same fees would have left about $14,419, or 5.8 percent, which is why funders watch margin so closely.

Who qualifies, and who usually does not

PO financing is built for businesses that resell finished goods: distributors, wholesalers, importers, private-label brands and government resellers that buy from a supplier and deliver a product the customer has already ordered. The customer must be a creditworthy business or government entity, because its payment is what repays the funder. The supplier must have a track record of delivering on time and to specification. Your personal score and operating history carry less weight than in a loan file, though funders do check for liens, judgments and fraud.

Manufacturers often struggle to qualify because a funder paying for raw materials, labor and overhead is financing a production process it cannot easily control or resell if something goes wrong. Some funders will finance a contract manufacturer making the goods for you, or the raw materials only. Service businesses, consumer sales, consignment arrangements and orders with open-ended acceptance terms generally do not fit, and some funders set minimum transaction sizes.

• Good fit: distributor buying finished goods for a retail chain
• Good fit: importer with a confirmed order and a vetted overseas supplier
• Good fit: reseller with a federal, state or prime-contractor purchase order
• Harder: manufacturer needing labor and overhead funded
• Poor fit: services, consumer orders, consignment, margins under about 10 percent

Pairing PO financing with factoring, and the pitfalls

Most PO funders either factor the resulting invoice themselves or work with a factor that does, and the two need an agreement on who holds which lien and in what order. If your business already has a lender with a blanket lien on receivables, that lender usually has to agree to release or subordinate the invoices from the PO transaction. Raise any existing liens on day one; it is the most common reason a PO deal stalls.

Three pitfalls cause most losses. A late or short shipment, which delays the invoice and adds fee increments. A customer that disputes quality or quantity, which delays payment and can trigger a chargeback under a recourse factoring agreement. And customer concentration or contra arrangements, which the factor may exclude from its advance. For government orders, the Assignment of Claims Act adds paperwork before the government will pay a financing company, so allow time for it.

Alternatives to PO financing

If the business has financial statements a bank can underwrite, a line of credit or an asset-based line covering receivables and inventory is cheaper for recurring orders. For contract-based work, SBA’s Contract CAPLine, part of the 7(a) program, finances the costs of specific contracts, including allocable overhead, with maturities up to 10 years and the standard 7(a) guarantee of 85 percent up to $150,000 and 75 percent above. A supplier deposit negotiated down, a customer deposit, or trade credit from the supplier can also shrink the amount you need to finance.