Purchase order financing guide for start-ups

This guide outlines how purchase order financing (PO financing) works and how to find a finance provider that’s the right fit for your business.

Start-ups and small businesses may struggle to fulfil a large order from a customer; PO financing could be the solution.

A big order for a small business can be something to celebrate.

However, start-ups may have limited funds, which can make it challenging to fulfil the order due to the cost of supplies, packaging, and other expenses.

Combine this with the fact that the start-up won’t be paid until the order is delivered, and it could lead to a cash flow problem or the need to turn down the order, both of which could slow down the growth of the business.

PO financing may be an option in this situation.

Read our guide to debt financing for small businesses.

If you’re considering PO financing, it’s a good idea to obtain independent and specialist financial advice before entering into any agreement.

What is purchase order financing?

PO financing is a finance option allowing businesses to pay a supplier’s costs ahead of being paid for an order, allowing them to fulfil the order for delivery.

Who is purchase order financing suitable for?

PO financing has broad eligibility and, unlike other types of funding, is available to businesses of all sizes, usually including new and growing start-ups and small businesses.

How does purchase order financing work?

The process for securing PO financing can vary depending on the finance company and the payment terms agreed with the supplier. However, a typical process is as follows:

• the business receives an order and works out how much it will cost to fulfil it
• the business decides it needs PO financing and contacts a finance company willing to cover up to 100% of the business’ supplier costs
• the finance company checks the creditworthiness of the end customer, approves the application, and provides the funding
• the business uses the finance to pay their supplier
• the business delivers the order to the end customer and sends an invoice requesting payment
• the finance company verifies the order and collects payment from the end customer
• once the end customer has paid, the finance company deducts its fees and the original loan amount and sends the remaining amount to the business.

What are the costs of PO financing?

Finance companies charge a monthly fee for providing PO financing, typically between 1.8% and 6%.

What are the pros of purchase order financing?

Available to small businesses

PO finance can be accessed by new and growing start-ups and small businesses, unlike other types of funding, which are only available to large or established companies.

Poor credit history is not necessarily a barrier

Businesses with a low credit score or limited credit history may be able to access PO financing because providers typically base a decision to approve an application on the creditworthiness of the end customer, not the business applying for the funding.

Quick access to funding

PO financing companies usually approve applications faster than traditional banks and may be able to provide PO finance within 24 hours.

Take on bigger orders

Accessing PO financing can mean you may be able to accept orders you might otherwise not have the funds to deal with.

This can positively impact the growth of your business.

What are the cons of purchase order financing?

High fees

PO financing companies typically charge a monthly fee of between 1.8% and 6%, which equates to annual percentage rates (APRs) of between 20% and 50%.

The longer the customer takes to pay the invoice, the more fees you may have to pay.

This can make PO financing an expensive funding option.

Impact on your business reputation

If you use a PO financing company to collect payment for your order, the customer might not like that their invoice has been sold to a third party and be concerned that your business is suffering from financial difficulties.

This could damage your business relationship and lead to the customer deciding not to use your company again.

Read our guide on strategies for measuring customer satisfaction.

Might not cover the entire purchase order value

The finance company might not cover 100% of the purchase order, so the business will have to fund the rest of the amount themselves or with another funding option.

Short term solution

PO finance is aimed at businesses looking for quick access to short-term cash.

If you have a more long-term need for funding, a traditional business loan or Start Up Loan could be a better funding option.

Read our guide on secured v unsecured business loans.

Not available to service businesses

PO financing is only available to businesses selling physical goods rather than services.

If you provide services, invoice finance might be a better option.

How can you choose the right PO financing provider?

There are many PO financing providers in the UK, but it is important that you find one that is the right fit for your small business.

Do your research online, speak to your accountant, and ask for recommendations from other business owners and on social media.

It’s advisable you choose a PO financing provider that understands your products and has experience in helping other businesses in your sector.

You could ask for examples of how they have supported companies like yours and how often they provide PO financing.

You could also read customer review websites for testimonials.

It’s also worth finding out how long the finance company has been running and whether they specialise in PO financing or offer it among a range of different services.

A well-established specialist may provide better value, experience, and customer service.

The next step is to compare and evaluate the fees charged by different PO financing providers.

It’s a good idea to ask what proportion of your purchase order value will be covered and how quickly you will receive the finance.

You will also need to know what will happen if your customer fails to pay.

It’s also worth understanding how the provider will vet your business, supplier, and customer.

Ask what types of documents are required for your finance application.

Lastly, check if you need to give a personal guarantee and if the provider requires a minimum annual revenue or purchase order value before it will approve finance for your business.

Find out if your business is eligible for a start-up loan.