Loan types
Purchase order financing, priced on a deal you almost turned down
A funder pays your supplier so you can fill an order you cannot afford. It costs 1.5 to 3.5 percent per thirty days and it only works above roughly 20 percent gross margin.
Purchase order financing is not a loan against your business. It is a funder paying your supplier directly so you can fill an order you already have and cannot otherwise afford to produce. Your balance sheet barely matters. Your customer's credit and your gross margin decide everything, and one of those two is the reason most files get declined.
The setup is always the same. A real customer sends you a real purchase order. You cannot pay the supplier out of pocket. A PO funder steps in, pays the supplier or opens a letter of credit in their favor, the goods ship, you invoice the customer, and the customer's payment retires the funder's position. What is left over is yours.
A $250,000 order, worked start to finish
You win a $250,000 purchase order from a national retailer with clean credit. Your supplier wants $175,000 up front, which is a 30 percent gross margin on the sale. You have $40,000 in the bank. Without financing this order does not happen.
A PO funder covers the full $175,000 supplier cost. The goods take 45 days to produce and ship, another 10 days to be received and invoiced, and the customer pays on net 30 terms. That is 85 days of exposure. At 2.5 percent per 30 day period, rounded up to three periods as most funders do, the fee is 7.5 percent of $175,000, or $13,125.
So the deal earns $75,000 of gross margin, the financing costs $13,125, and you keep $61,875 on an order you could not have accepted at all. That is 82 percent of the margin. Nobody enjoys handing over $13,125, but the honest comparison is not against a cheaper loan you cannot get. It is against declining the order and keeping zero.
Why gross margin is the whole qualification
PO financing is priced on the amount funded, not on your profit, so a thin margin gets eaten alive. Most funders want at least 20 percent gross margin and prefer 25 or better. Here is the same $250,000 order at five different margins.
| Gross margin | Supplier cost funded | PO fee | Your margin before the fee | Fee as a share of your margin |
|---|---|---|---|---|
| 15 percent | $212,500 | $15,938 | $37,500 | 43 percent |
| 20 percent | $200,000 | $15,000 | $50,000 | 30 percent |
| 25 percent | $187,500 | $14,063 | $62,500 | 22 percent |
| 30 percent | $175,000 | $13,125 | $75,000 | 18 percent |
| 40 percent | $150,000 | $11,250 | $100,000 | 11 percent |
At 15 percent margin the funder takes almost half your profit and one shipping delay wipes out the rest. That is why the answer at that level is usually no, and a no from an experienced desk is worth more than a yes that leaves you working for free. A smaller $50,000 order behaves the same way: $35,000 of supplier cost at 5 percent over 60 days costs $1,750 against $15,000 of margin, which is a fine trade.
What the funder actually underwrites
This is transaction underwriting, not company underwriting. Three parties get looked at, and you are the least important of the three.
- Your customer. Their credit is the repayment source. A purchase order from a national retailer, a hospital system, or a government agency gets funded. A purchase order from a startup with no trade history usually does not, no matter how good your margin looks.
- Your supplier. They need a track record of delivering on spec and on time. A first time overseas supplier with no history is a common decline reason, because the funder's money is out the door before anything ships.
- The goods. Most funders want finished goods you resell, not raw materials you transform. If your process turns inputs into a different product, you are asking for work in process financing, which is a much smaller market and a higher price.
- The order itself. No contingencies, no consignment, no guaranteed sale, no right of return beyond the ordinary. A cancelable order is not collateral.
- You. Enough operational competence to move the goods, and a clean receivables aging showing you get paid on the orders you already fill.
The practical consequence is that your file gets built in a specific order. Before anyone looks at your bank statements, the desk wants the purchase order itself, the supplier quote or proforma invoice, and the name of the buyer. Those three documents answer 80 percent of the question. Everything else, including your bank statements and your tax returns, is confirmation rather than decision.
How it stacks with factoring
PO financing and invoice factoring are two halves of the same cash cycle, and most PO deals close with a factoring takeout. PO money covers you from supplier payment to delivery. Factoring covers you from invoice to customer payment. Together they turn an 85 day gap into same week cash.
On our example, factoring the $250,000 invoice at delivery costs roughly 2.5 percent for the 30 days you would otherwise wait, or $6,250, but it retires the PO position 30 days sooner and saves one PO period worth $4,375. Net extra cost of about $1,875 to have your money a month earlier, and to be able to fund the next order instead of waiting. If you are running back to back orders, that is usually worth it. If this is a one time deal, it usually is not.
- Typical advance
- 70 to 100 percent of verified supplier cost, higher when the funder pays the supplier directly by letter of credit
- Typical cost
- 1.5 to 3.5 percent of the funded amount per 30 days, sometimes 3 to 4 percent for the first period then a daily or weekly accrual
- Deal size
- Commonly $50,000 to $5,000,000 per order. Below about $25,000 the diligence cost makes it hard to write
- Time to fund
- 5 to 15 business days on a first transaction, 2 to 5 days on repeat orders with the same customer and supplier
- What is filed
- A UCC-1 on the inventory and the resulting receivable, plus an assignment of the invoice proceeds
- Personal guarantee
- Usually a validity guarantee rather than a full payment guarantee, which is a meaningfully better deal for you
When to walk away from the order
There are four situations where the right move is to decline the purchase order rather than finance it. Say them out loud before you sign anything, because none of them show up on a term sheet.
First, the margin is under 20 percent and the buyer is slow. Second, the supplier has never shipped this product to you before and there is no penalty in the supplier contract for a late ship. Third, the order is large enough that a single rejected shipment takes the company down, which is the definition of betting the business on someone else's quality control. Fourth, your customer accounts for so much of your revenue that losing them over a delivery problem costs more than the order is worth. A good desk raises all four with you. A commission driven one raises none of them.
What Exp Capital does with this
Exp Capital Solutions is a broker. We do not fund purchase orders, we do not approve them, and we do not set the fee schedule. What we do is read the order, the supplier quote, and your margin before anything gets submitted, then place the file with the funding partners that actually write your product category and your customer type. We will tell you when the margin is too thin for this to work, and we will tell you when a cheaper inventory line or a factoring facility covers the same gap for less, even though those pay us less.