Purchase order financing: A flexible tool to help you fulfil large orders

PO financing provides the liquidity you need to take on bigger orders with confidence

4-minute read

Your efforts to land a new client have finally paid off with a large purchase order that’s going to put your company on a higher growth trajectory.

But the order comes with a big challenge. How will you pay for the inputs you need to fill it?

You don’t have enough cash flow to pay your staff and suppliers, and without a solution, you’ll be faced with either putting your company’s financial stability at risk or delaying or turning down the order.

The answer may well be to use purchase order (PO) financing—a short-term loan that provides your business with the liquidity it needs to fill orders.

“PO financing is a tool that gives entrepreneurs more capacity to grow,” says Isabelle Leduc, Specialist, Operations Support at BDC. “It takes away the stress of saying: ‘Okay, I have this order, now how am I going to fill it?’”

Allows you to take on more business

Leduc says PO financing allows businesses to accept larger contracts. It is also a way to avoid factoring, a form of financing where you generate short-term cash by selling your invoices to a bank or specialized firm at a discount.

Leduc is a member of a team that worked on a new PO financing product recently launched by BDC, in partnership with Export Development Canada (EDC).

Plan ahead for financing needs

While researching the PO financing market, Leduc says she’s found too many entrepreneurs react to a potential cash crunch late in the process and only when they already have a large order in hand.

That can cause them to be in a reactive mode, searching for a cash flow solution at the last minute and under stress. A better route is to discuss your financing needs early based on your sales, she says.

It’s better to plan PO financing needs ahead of time than to be reactive.

“Getting a PO is not something where you wake up in the morning and it’s a surprise. You’re soliciting those clients, and it usually takes months before it ends up as a PO. So, it’s better to plan PO financing needs ahead of time than to be reactive.”

A good tool to protect your cash flow

BDC’s PO financing will cover up to 90% of the value of a purchase order and will be complementary to your line of credit with another financial institution. In this way, it protects both you working capital and short-term borrowing capacity.

It’s tailored so your loan term is timed to coincide with either invoicing your order or receiving payment. You only pay interest during the term of the loan and make a one-time balloon payment at the loan’s maturity.

For international purchase orders, entrepreneurs will benefit from EDC’s expertise in evaluating the trustworthiness of international buyers. This allows you to take on new customers and start doing business in unfamiliar markets, obtaining credit insurance when necessary.

Clear advantages over factoring

One key advantage of PO financing over reverse and traditional factoring—besides being a less expensive form of financing—is that suppliers and customers only deal with your company. This contrasts with factoring arrangements where the financial institution pays your suppliers and collects on a receivable from your customer.

We let entrepreneurs manage the supplier payments and collect their accounts receivable, reinforcing a relationship of trust with their suppliers and clients.

“When using reverse and traditional factoring, it becomes very clear to suppliers and clients that: ‘Oh, you’re not big enough to support that order from your cash flow. So you need your bank or another lender to back you up,’” Leduc says. “We let entrepreneurs manage the supplier payments and collect their accounts receivable, reinforcing a relationship of trust with their suppliers and clients.”

She said the goal of the PO financing product is to help entrepreneurs scale up their businesses.

“It’s all about being able to accept larger contracts, larger purchase orders. It allows you to be confident and say: ‘I’m going out there and get that business.’”