The Ins and Outs of Purchase-Order Loans

By Carol Tice
Exclusively for BVR Times


Plenty of business owners have sold their receivables at a discount when they needed some quick cash. But what if you're in an even worse bind – you've landed a big, lucrative contract, but you don't have the money to make the goods or purchase the supplies you need to do the job?

An increasingly popular solution to this problem is purchase-order financing – a loan secured by a customer's commitment to purchase goods from your business. While P.O. finance has been around for a couple of decades, companies that do this form of lending report business has boomed since the downturn hit in 2008.

P.O. finance's appeal isn't the cost. Since it's even riskier than receivables financing, costs are higher.

The beauty part is that P.O. lenders don't care about your business's credit history. You could have a business bankruptcy, be months overdue on your rent, whatever.

They don't look at your credit rating – they look at your customer's credit rating. This opens the door to funding for companies that have troubled credit histories. It can get your business the cash infusion you need to keep sales rolling.

Most P.O. lenders are independent companies, but some banks do P.O. finance as well. Wells Fargo has a P.O. lending unit, for instance.

Charges for using purchase-order finance can be steep. Annualized interest rates can exceed 40 percent, which is a scary prospect. But most P.O. loans are paid in 30 days at a rate around 3.5 percent interest for the month, so it doesn't end up being that big of a bite.

P.O. finance works like this:

If a lender likes your customer's credit rating, they set up a letter of credit or bank draft and pay the manufacturer or supplier for their goods. The lender may also pay the cost of shipping the merchandise, if your business can't.

Once the goods are made or procured, they're shipped out. Your business never takes possession of the merchandise. Guarding their investment, the lender makes sure the goods get delivered directly to your customer or to a bonded, third-party warehouse.

When the customer gets the supplies, your business sends the customer an invoice for the amount due, payable to the lender. From here, things can go one of two ways.

If the customer pays right away, the P.O. lender collects the payment, pockets their interest charge and the price of any other costs they incurred, and sends your company the remaining profit.

If the customer pays on a long timeline, say 60 or 90 days, the P.O. lender may also turn into a receivables lender, also known as a factor lender. The lender would then purchase your invoice at a discount and pay you the profits – minus their factor-loan charge – immediately.

Obviously, P.O. lending is not a first-choice borrowing option. Bank interest rates are cheaper. But if you can't get a bank credit line or loan and you've maxed out your business credit cards, a P.O. loan can keep your business rolling.