You’ve just signed a huge contract. The whole team is celebrating. Your business could be transformed overnight... if only you had the resources to keep every promise you’ve just made.

Many startups and small business owners face situations like this, where they’ve promised more than they have the means to deliver. Successful business owners find ways to keep those promises.

Purchase order financing, also called PO financing or purchase order funding, can mean the difference between keeping your promises and missing out on the loyalty of a vital customer.

With this form of business funding, you’re essentially enlisting a lender as your semi-silent partner to get what your business needs to complete the deal.

A purchase order financing company that approves your business’ PO financing application will pay your suppliers directly for whatever goods or products your business needs to provide to its customers. This might involve an immediate payment or the opening of a letter of credit between lender and supplier, depending on several factors.

You’ll sometimes pledge to repay the financed amount by allowing the PO financing company to collect payments directly from your customers, but this isn’t an ironclad condition of PO financing.

Purchase order financing is not equivalent to a term loan, working capital, or a line of credit. It’s a highly specific form of business funding that’s only available to product-focused companies with creditworthy customers placing high-value orders -- and it’s only usable to pay for the goods you need to buy or have made, so you can deliver them to your customers.

PO finance works for many businesses that need cover short-term cash flow problems while serving important customers. However, most businesses seek out purchase order financing solutions after they've already gotten an estimate or invoice from their suppliers to fulfill customer orders.

You might already know, before getting a supplier’s invoice, that your business won’t be able to pay it in full from its current cash flow. However, it’s a lot harder to secure PO financing if you can’t show a lender exactly how much it’ll cost you to fulfill that order.

Purchase order financing and invoice factoring seem very similar at first glance, which is why many small businesses that apply for funding backed by specific orders or contracts often get them mixed up.

Both involve enlisting a financing company to deal with large orders or accounts receivable, and in both cases, the customer pays their invoices directly to the financing company -- usually, but not always.

PO finance tends to come with slightly higher fees due to the less complete nature of a purchase order transaction, compared to an invoice for finished goods or delivered products. However, it can be a better option than invoice factoring for product-focused B2B businesses, such as manufacturers or wholesalers.

Click here to learn more about invoice factoring.

In fact, some businesses combine purchase order financing with invoice factoring, pledging both the unfulfilled and the completed sides of the same transaction.

This can work well when the invoice has extended repayment terms, and obtaining lower-cost invoice factoring at the end of a transaction can lower a business’ total transaction costs more than would be possible with PO financing alone.

An experienced financing or factoring company won’t push you into taking on more financing than it thinks you can handle. You'll also get a clearer understanding of your options when you talk to someone who really knows the ins and outs of small business funding -- like an Amerifi funding specialist.

Purchase order financing is harder to obtain than invoice factoring.

Not only do you have to secure purchase orders with highly specific terms, you’ll also depend on the business credit histories of both your customer and your supplier for approval.

The nature of purchase order financing tends to restrict it to businesses that deal with physical products, particularly unmodified products ordered from a manufacturer and delivered directly to a customer. The minimum value of the purchase order must also be quite high -- $100,000 or more -- to obtain financing, which tends to restrict this form of funding to businesses serving very large customers.

Direct manufacturers and service providers, such as construction contractors, can also obtain purchase order financing, or something similar. The terms between a direct manufacturer and a lender will be different than those between a lender and a wholesaler or reseller.

Service providers seeking financing to fulfill large contracts are typically further restricted by the type of customer they’re contracted to. In some cases, government contract financing may be the only type of financing available to service providers before they’ve delivered their service.

This type of financing will only help businesses fulfill contracts for products or services with federal, state, or local governments, but due to the size of many government contracts, it can be a great option for ambitious government contractors competing for big jobs.

Talk to us today about your best financing options for converting commitments with customers into cash.