Purchase order finance
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A finance provider funds the seller to make and ship a buyer's order, and the buyer's payment usually pays it back.
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01 · In plain words
A finance provider pays for your materials and work, and the buyer's payment usually repays it
You win an order, but you need money to buy materials and pay workers before you can ship. , or PO finance, fills that gap. A finance provider lends to the seller so the seller can source, make or finish the goods for the buyer (Global Supply Chain Finance Forum).
The Global Supply Chain Finance Forum, or GSCFF, treats PO finance as another name for . A purchase order from an acceptable buyer is often a key reason the provider agrees to lend (GSCFF).
The provider may pay out a share of the order value, in stages. When the buyer pays for the goods, that money usually repays the provider (GSCFF). The provider's main concern is whether you, the seller, can make and deliver the goods. This is called .
Who is involved
- The seller, or exporter, receives the funds and fills the order.
- The finance provider, a bank or a non-bank firm, lends the money. GSCFF says both are active in PO finance, particularly in Asia.
- The buyer, or importer, places the order and later pays for the goods. The financing itself is between the seller and the provider only.
- For US exporters only, a US government body may back the lender. gives the lender a 90% guarantee under its (US EXIM). The SBA offers lenders up to a 90 percent guarantee on export loans up to $5 million (US ITA).
02 · How it works
Eight steps take the deal from the buyer's order to the buyer's payment
Figure 1 · Interactive
Purchase order finance, step by step
Read down the steps. The last step is where the buyer's payment usually repays the provider.
Source: Global Supply Chain Finance Forum, Standard Definitions: Pre-shipment Finance (transaction illustration and distinctive features).
03 · What it means for you
The seller gets funds to fill the order, and the buyer's payment usually repays the provider later
Figure 2 · Interactive
What PO finance means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million order, an illustrative advance of $700,000 costs $10,500 in interest
This example uses round, made-up numbers. The order is worth $1,000,000. The provider advances 70% of it in two stages: $420,000 on day 0 for materials and $280,000 on day 30 for labor and packing. Interest is 5.00% a year on a 360-day basis. The buyer pays on day 120. Real terms vary by provider, country and deal.
Figure 3 · Illustrative
A $1,000,000 order financed in two stages
Illustrative inputs. The amount left for the seller is highlighted.
Made-up rates, worked out by our checking script. Your provider's terms will differ by provider, country and deal.
05 · When to use it
PO finance suits a seller with a firm order from a sound buyer and a record of delivering
Good fit when
- You hold a firm order from an acceptable buyer and need money for materials, labor and other inputs before you ship (GSCFF; US EXIM).
- You are a US exporter whose order meets the EXIM Working Capital Loan Guarantee rules, including at least 10% US content in the goods. This applies to US exporters only (US EXIM).
- You plan to move to finance on your invoices once the goods ship (GSCFF).
Another tool may suit better when
- Your record of delivering on time is short. The provider's main risk is your performance. GSCFF lists advances under a red clause letter of credit as a variation of this finance.
- Your buyer's credit is weak. The buyer's payment usually repays the provider. Payment backed by a bank, such as a standby letter of credit or a letter of credit, can support it.
- The goods have already shipped and you hold an invoice. Look at invoice discounting or factoring.
06 · Rules and a real case
PO finance runs on your own agreements, and an EXIM-backed working capital loan helped a US exporter fill a $47 million order
The terms of PO finance sit in the financing agreement and any security agreement between the seller and the provider (GSCFF). The GSCFF definitions are published by the ICC, dated January 9, 2017, and the ICC calls them a living document that will need periodic updates (ICC).
GSCFF says PO finance is most commonly provided in an sale. Repayment may also come from a , a or a in the seller's favor. When an LC says it follows UCP 600, those ICC rules apply to the LC (ICC). GSCFF also lists advances under and letters of credit as variations.
The , the date the finance must be repaid, is set between the seller and the provider. It is often tied to the date the buyer will pay (GSCFF). For US export working capital loans tied to one deal, the US ITA says the loan is generally issued for up to one year (US ITA).
Security over goods and receivables follows local law. The UNCITRAL Model Law on Secured Transactions (2016) covers security interests in goods, receivables and other movable property, for countries that adopt it (UNCITRAL).
A real case. On August 9, 1999, US EXIM announced it had guaranteed a $1.5 million working capital loan from Fleet National Bank to Imaging Automation Inc. of Bedford, New Hampshire. The loan helped the company fill a $47 million sale to Argentina. The contract let the company add 100 new employees, more than tripling its staff (US EXIM press release).
Summary
PO finance turns a firm order into funds to make the goods, usually repaid when the buyer pays
The seller gets funds before shipment, often in stages, to buy materials and pay for work. The provider relies on the seller to deliver and on the buyer to pay. Once the goods ship, the provider may offer finance on the invoice, and the buyer's payment closes the deal.
Related guides: Pre-shipment vs post-shipment finance; Working capital and trade finance; Receivables finance. Related cards: Pre-export finance; Red clause letter of credit; Invoice discounting. Every term is in the Trade Finance Glossary.
Sources
- Global Supply Chain Finance Forum (ICC, BAFT, EBA, FCI, ITFA), Standard Definitions: Pre-shipment Finance, 2016. Supports: definition, other name, parties, the eight-step flow, staged advances, maturity, main risk, security and inspection, post-shipment finance, variations
- International Chamber of Commerce, Standard Definitions for Techniques of Supply Chain Finance (publication page), January 9, 2017. Supports: publication date and status of the definitions
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), July 2022. Supports: loan term of up to one year, SBA Export Working Capital Program
- Export-Import Bank of the United States, Working Capital Loan Guarantee, undated. Supports: 90% guarantee, uses of the funds, 10% US content
- Export-Import Bank of the United States, New Hampshire small business triples employment through export sale supported by Ex-Im Bank working capital guarantee, August 9, 1999. Supports: the real case
- UNCITRAL, UNCITRAL Model Law on Secured Transactions (2016), 2016. Supports: security over goods and receivables
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: rules for an LC used for repayment
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