How to Improve Cash Flow with Purchase Order Financing

What is Purchase Order Financing?

Purchase order financing is a short-term financing method used to cover the cost of manufacturing or purchasing of goods that have been pre-sold to customers through a purchase order. Businesses then send invoices to their customers, who send their payments directly to the PO financing company.

The advantage of PO financing is that it is much faster than traditional financing and it’s your customers’ creditworthiness that is considered not yours. Additionally, PO financing is not new to the business world. It is a very common tool for many businesses in a variety of industries.

How Does Purchase Order Financing Work?

Imagine receiving a purchase order from your best customer for goods you don’t have in stock. You need to either manufacture the product or purchase it from someone else, but you don’t have the capital to do either. What are you going to do?

If you decline to take on the new order you risk losing the new customer, which could lose a long-term earning opportunity for your company. Universal Funding offers a solution to this cash-flow dilemma: Purchase Order Financing.

Here’s an overview of how it works:

1. Customer Orders: Your receive purchase orders from your customers.
2. Cost Estimate: You provide the cost breakdown of the purchase order to Universal Funding including materials and/or labor.
3. Funding: You and or your supplier is paid by Universal Funding. This may be for supplies, materials, and/or labor.
4. Order Fulfilled: You and/or your supplier fulfills the order and your customer accepts the goods.
5. Invoicing: You invoice your customer for the fulfilled order. You then submit your invoices to Universal Funding for factoring.
6. Invoice Factored: The proceeds of factoring pays off the purchase order funding and the remaining advance goes to you.
7. Customer Pays: Your customer pays their invoice directly to Universal Funding.
8. Final Close-out: Universal Funding deducts the advance and the fees, then pays you the remaining balance.

Now the order has been fulfilled without taking on more debt and you earn the profits instead of having to turn down the business.

How Does PO Financing Improve Cash Flow?

Purchase Order financing can be a powerful tool for improving a business’s cash flow, especially for companies that deal with large orders but lack the funds to fulfill them. Here’s how it works and why it can help:

1. Covers Supplier Costs

PO financing provides upfront funds to pay your suppliers for goods needed to fulfill a customer’s order. Instead of dipping into your own cash reserves, you can use financing to handle production or inventory costs.

2. Enables Larger Orders

With PO financing, you don’t have to turn down large or unexpected orders due to lack of capital. This allows your business to grow by taking on more or bigger jobs without immediate financial strain.

3. Preserves Working Capital

Rather than tying up your working capital in production costs, you can keep that cash available for other expenses like payroll, rent, or marketing. This improves liquidity and financial flexibility.

4. Shortens Cash Flow Gaps

PO financing helps bridge the gap between paying suppliers and getting paid by customers. Since the financing company pays the supplier directly, you can fulfill the order and get paid without enduring long payment cycles.

5. Improves Supplier Relationships

Paying suppliers on time (or early) with PO financing can strengthen your business relationships and may even help you negotiate better terms or discounts.

6. No Need for Long-Term Debt

PO financing is typically a short-term funding solution tied to a specific order, not a loan that stays on your balance sheet long-term. That means it helps cash flow without adding lasting debt.

PO financing gives you the ability to accept more orders, pay suppliers on time, and maintain a healthy cash flow — all without needing to secure traditional loans or give up equity. It’s especially useful for businesses experiencing rapid growth or seasonal spikes in demand.

Can PO Funding Fuel Growth?

Purchase order financing is an often overlooked way to get the cash you need to grow your business. Here’s how PO funding acts as a catalyst for scaling your operations:

1. Take on Bigger Orders

Growth often means landing large orders — but fulfilling them requires upfront capital. PO funding covers supplier costs, so you can accept bigger deals without draining your own resources.

2. Say Yes More Often

Instead of turning down opportunities due to lack of cash, PO funding empowers you to say “yes” to new clients and larger contracts, accelerating revenue generation.

3. Expand Without Equity or Long-Term Debt

Unlike raising investor capital or taking out long-term loans, PO funding doesn’t require giving up ownership or taking on lasting debt. It’s tied to specific purchase orders, making it a flexible growth tool.

4. Scale Operations Smoothly

By easing cash flow strain, PO funding allows you to increase production capacity, hire temporary help, or invest in logistics — all essential steps when scaling up.

5. Improve Reputation and Reliability

Consistently fulfilling large and urgent orders helps build trust with major customers, strengthening your reputation and encouraging repeat business.

PO funding isn’t just a cash flow solution — it’s a growth enabler. It gives you the confidence and capability to grow your business without hesitation, even when your bank balance says otherwise.

What’s the Difference Between PO Financing and Invoice Factoring?

If you are a business owner in need of immediate financing, you may be considering Purchase Order Financing or Invoice Factoring, especially with the rising interest rates of traditional bank loans. While these two options have similar origins, they are two different financing tools for businesses. With so much information available on purchase order financing and invoice factoring, it might be confusing about which one is best for your business. Following is a comparison of the two types of financing methods.

PO Financing vs Invoice Factoring: Which is Best?

Purchase order financing is a short-term financing method used to obtains quick access to working capital to cover the cost of manufacturing or purchasing of goods that have been presold through a purchase order.

PO financing is used when your suppliers receive funds from a financing company for goods that you’re reselling or distributing, but have not yet produced. Payment for the goods purchased from your company will then go to the purchase order financing company.

Invoice factoring involves a business selling its invoices or accounts receivable to a factoring company for an advance rate that can range from 80-95%. The invoices are unpaid invoices from another business and the factoring company receives the payment from customers on the invoices. You then receive the balance minus the factoring fee.

Similarities Between PO Funding and Invoice Factoring

• Quick Financing. Compared to the lengthy process of traditional financing, PO financing and invoice factoring can be obtained in a matter of days.
• Credit Worthiness. Both methods of financing focus on the credit worthiness of your client rather than your balance sheet. While banks look to your past history of managing your company’s finances and credit, when determining if a line of credit or loan will be approved.
• Great for Newer Companies. Since factoring companies put more weight on the clients’ creditworthiness, younger businesses are often able to qualify for the financing they need.
• Credit Line Grows as You Grow. Lines of credit can get maxed out rather quickly, especially when experiencing rapid growth. With invoice factoring and PO financing, your facility limit grows along with your company providing more funds when you need allowing you to sustain growth.

How are Invoice Factoring and PO Funding Different?

• Cost of Capital. While rates vary, the cost of PO Financing typically is more expensive than invoice factoring.
• Profit Margin. PO financing companies often require a profit margin around 20% on purchase orders.
• Service-Based Companies. If you provide professional services, such as temporary staffing, purchase order financing would not be available to you. PO financing is tool that can only be used when a physical product is being purchase. Invoice factoring can be used for companies that sell products or provide services in a B2B environment.
• How Funds Can Be Used. While PO financing can finance up to 100% of the cost of producing a product, including materials and labor, funds can’t be used for anything else. With invoice factoring there are typically no restriction on what the working capital can be used for.
• Supplier Requires COD. If a supplier requires payment as COD, PO financing can be the best route for a company if they do not have the cash available to purchase the materials in full.
• Supplier Net Terms. If the materials supplier offers net terms that allow enough time to produce the finished product and deliver to the end customer, invoice factoring is the preferred financing method. Once delivered, the company can then submit the invoice to the factoring company who will quickly advance the funds needed to pay the suppliers at a lower cost compared to purchase order financing.

While purchase order financing and invoice factoring are clearly different forms of financing, their purpose is the same—to create cash flow and enhance business growth.

If you’d like to learn more about PO financing, give us a call today at 800.405.6035 to speak with a funding specialist.

Related: 10 Considerations When Selecting the Best Factoring Company for Your Business