Purchase order (PO) financing helps businesses fund large customer orders without upfront capital. The lender pays your supplier directly, so you can fulfill the order. Once your customer pays, you repay the lender, minus fees (1.8%-6% monthly). This is ideal for eCommerce sellers, wholesalers, and manufacturers managing cash flow gaps during growth or seasonal demand.
Key Points:
- Who It's For: Businesses with confirmed large orders and reliable customers/suppliers.
- Costs: High fees (up to 72% APR annually); profit margins must cover costs.
- Process: Apply with documentation, get approved, supplier gets paid, and order is fulfilled.
- Pros: No collateral, fast approval, supports growth.
- Cons: High costs, limited to specific orders, customer credit-dependent.
Alternatives: Revenue-based funding (flexible, tied to sales) or inventory financing (uses stock as collateral). Choose based on your business needs and goals.
Purchase Order Financing: Everything You Need to Know (2024)
The Purchase Order Financing Process
Let’s break down how purchase order (PO) financing works and what it takes to secure funding:
How to Get Funded
The process of getting PO financing involves three main steps:
- Order Receipt and Documentation
Start by gathering the necessary paperwork, including:
- Your purchase order
- A supplier quote
- Financial or bank statements
- Application and Review
Submit your application, which will be assessed based on:
- The profit margins for the order
- The reliability of your supplier
- Whether the transaction is practical and achievable
- Funding and Fulfillment
Once approved:
- The lender pays your supplier directly (up to 100% of the costs)
- Your supplier produces and ships the goods
- The customer receives the order and is invoiced
- Payments go directly to the financing company
- You get the remaining balance after fees are deducted
For businesses with an existing relationship with the lender, approvals typically take 24-48 hours, and funds are released within 3-5 business days after approval [2][4]. This quick turnaround is ideal for eCommerce sellers scaling their operations.
Who Can Apply
| Qualification Criteria | Details |
|---|---|
| Business Type | eCommerce sellers, wholesalers, distributors, manufacturers, resellers |
| Order Requirements | Minimum order value of $5,000 [2][4]; clear and complete documentation |
| Profit Margins | Margins must be high enough to cover financing costs |
| Supplier Relations | Must work with dependable suppliers with a solid track record |
This financing option is ideal for businesses that:
- Have secured large orders from customers with good credit
- Partner with trustworthy suppliers
- Maintain strong profit margins on their products
- Have a proven history of fulfilling orders successfully
- Are marketplace sellers managing sudden spikes in demand
Advantages and Disadvantages
Once you understand how PO financing works, the next step is to weigh its benefits against its costs.
PO financing can help eCommerce sellers grow by allowing them to take on larger orders without needing upfront capital. This removes cash flow issues that might otherwise hold back expansion. However, it comes at a price - equivalent APRs range from 21.6% to 72% annually, making it one of the more expensive financing options. These costs reflect the lender's margins, as previously discussed.
Side-by-Side Comparison
| Benefits | Limitations |
|---|---|
| Fast approval process | High costs (1.8-6% monthly fees) |
| No collateral needed | Only applies to specific purchase orders |
| Accessible to newer businesses | Customer creditworthiness is closely evaluated |
| Helps accept larger orders | Lenders may communicate directly with your customers |
| Useful for managing seasonal demand | Requires coordination between your business, supplier, and lender |
| Less emphasis on credit history | Not ideal for long-term financing |
PO financing works best in certain situations. It’s especially helpful for fast-growing startups that need quick access to funds [4][6]. However, it depends on having reliable suppliers and customers with strong credit [3][5].
Before choosing this option, sellers should ensure the profits from their orders will cover the fees and make the deal worthwhile.
This naturally leads to comparing PO financing with other options, such as revenue-based funding.
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Other Funding Options
While purchase order financing focuses on specific orders, eCommerce businesses have other choices to consider:
Revenue-Based Funding with Onramp Funds
Revenue-based funding offers capital based on your sales history. Platforms like Onramp Funds provide approvals within 24-48 hours, with repayments tied to daily sales. This means no fixed monthly payments - repayments adjust automatically based on how much you sell. To qualify, you’ll need at least $3,000 in monthly sales [7].
Here’s how revenue-based funding compares to purchase order financing:
| Feature | Revenue-Based Funding | Purchase Order Financing |
|---|---|---|
| Funding Range | $10,000 - $10M [8] | Based on order value |
| Repayment Terms | 6-12 months average [8] | Tied to order payment |
| Typical Costs | 6-12% flat fee [8] | 1.8-6% monthly |
| Use of Funds | Flexible (inventory, marketing, operations) | Specific order fulfillment only |
| Platform Requirements | Major eCommerce platforms | Any B2B transaction |
Purchase Order vs. Inventory Financing
Inventory financing works differently - it uses your inventory as collateral instead of focusing on specific orders. This option is great for bulk purchases or preparing for seasonal demand [3][4].
Deciding between these funding types depends on your goals. If you need to fulfill confirmed orders, purchase order financing is the way to go. But if you’re looking to stock up for future sales, inventory financing might make more sense. Many established sellers combine these options - using revenue-based funding for daily operations and inventory financing for larger, strategic purchases.
While purchase order financing helps cover pre-production costs, inventory financing supports the stock you already have. Together, these options can address different growth stages, from fulfilling orders to scaling your inventory.
Selecting a Financing Provider
After comparing PO financing with options like revenue-based funding, it's time to focus on the key factors that will help you choose the right provider.
What to Look For
When evaluating providers, prioritize features that streamline the process and offer clear benefits to your business.
Direct Integration with Sales Platforms
Look for providers that connect directly to your sales platforms. This allows for quicker approvals by automating data sharing.
Cost Structure
Understand the complete cost of financing upfront. Monthly fees usually range from 1.8% to 6%, depending on the provider and risk factors[3].
Industry Experience
Select providers with a track record in your product category. They should understand the unique challenges and seasonal trends in your niche[1].
| Red Flags | Better Alternatives |
|---|---|
| No dedicated account manager | Providers offering dedicated account support |
| Hidden fees or unclear charges | Transparent pricing with detailed breakdowns |
| Lack of eCommerce platform integration | Providers with direct connections to major platforms |
| Generic approach to industries | Providers experienced in your specific product type |
| Fixed repayment schedules | Flexible repayment terms tied to sales cycles |
Onramp Funds Features
Onramp Funds stands out with some key features:
Clear Pricing
Onramp Funds uses a fixed-fee pricing model, ranging from 2-8%, with no hidden fees.
Comprehensive Support
- Transparent fee structure with no surprises
- Access to a dedicated account manager
- Automatic repayments based on sales performance
These features make Onramp Funds a strong choice for businesses looking for flexibility and clarity.
Summary
Purchase order financing is a helpful funding option for eCommerce businesses that encounter large growth opportunities but lack the cash to seize them. This type of financing allows businesses to bridge the gap between receiving a large order and actually fulfilling it. As discussed in this guide, PO financing is most effective when paired with healthy profit margins and trustworthy trading partners.
Key Benefits and Uses
With monthly fees ranging from 1.8% to 6% [5], this option makes sense when your profit margins comfortably exceed the cost of financing - especially for businesses with margins of 30% or more.
Newer Financing Options
The eCommerce funding world has expanded beyond traditional PO financing. Revenue-based financing, offered by companies like Onramp Funds, provides a more flexible option. These funds can be used not just for fulfilling orders but also for inventory, marketing, or operational needs.
Choosing the Right Option
When deciding if PO financing is the best fit, focus on these factors:
- The size of the order and your profit margins
- How reliable your customers and suppliers are
- How quickly the order needs to be fulfilled
- Whether other options, like revenue-based financing, might better suit your needs
While purchase order financing is ideal for tackling specific order-related challenges, eCommerce businesses should regularly evaluate whether other funding methods, such as inventory or revenue-based financing, might better align with their growth plans.
FAQs
Here are clear answers to some common questions to help you navigate the key points covered in this guide:
Who can use PO financing?
This option is available to businesses that have confirmed purchase orders from reliable buyers with good credit and dependable suppliers. Check out our Qualifications table for more details.
What are the costs and terms like?
Costs can equate to annual rates as high as 72% (refer to the Cost Analysis). While this is more expensive than traditional financing, it allows you to fulfill orders without draining your cash flow.
How does PO financing work?
The process includes lender approval of your purchase order, direct payment to your supplier, and repayment once your customer pays. For a detailed breakdown of requirements and timelines, see the "How to Get Funded" section.
Are there alternatives to PO financing?
Yes, other options include revenue-based financing, inventory financing, invoice factoring, and business lines of credit. Each option fits different business needs, which we cover in the "Other Funding Options" section.
When is PO financing a good choice?
PO financing is a good fit when you face situations like:
- Orders that exceed your available cash
- Profit margins above 30%
- Urgent supplier payments
- Customers with approved credit
What challenges should I expect?
The main challenges include high fees (1.8-6% monthly), risks tied to customer payments, and a focus on single orders. While it can address short-term cash flow gaps, it’s not ideal for ongoing needs. For more insights, see our Advantages/Disadvantages comparison.
