Purchase order financing in Canada

A big order is good news until you have to pay your supplier to fill it — weeks or months before your customer pays you. Purchase order (PO) financing covers that gap: a financier pays your supplier directly, your customer pays when the goods are delivered, and you keep what is left after the financier's fee.

It is used most by distributors, wholesalers, importers and resellers — businesses that buy finished goods and sell them on.

How it works

1. You receive a confirmed purchase order from a creditworthy customer.
2. The financier pays your supplier — directly, or through a letter of credit — so the goods are produced and shipped.
3. The goods are delivered to your customer, and you invoice them.
4. Your customer pays, often to the financier, on their usual terms.
5. The financier deducts what it advanced and its fee, and pays you the rest — your margin.

Often the invoice is then handed over to invoice factoring or a receivables facility to cover the wait between delivery and payment.

Who it suits

• You buy and resell finished goods. PO financing works best where there is little or no manufacturing on your side — the goods go from supplier to customer.
• Your customer is strong. Financiers look closely at your customer's ability to pay, sometimes more than at your own business. Large retailers, established companies and governments make good customers for this.
• Your margin is healthy. The fee comes out of the margin on the order. A thin margin can disappear.
• The order is bigger than your cash allows. Especially for a growing business landing its first large contract.

What it costs

PO financing is usually priced as a fee on the amount advanced, charged for each period — often each month — that the money is outstanding. The longer your supplier takes to deliver and your customer takes to pay, the more it costs.

Before you agree, work out the fee in dollars on this order, from supplier payment to customer payment, including any setup or due diligence fees. Then take it off your margin. If what is left is worth the work, it is a good deal. The business loan calculator can help compare it with a loan on the same amount.

What you will be asked for

• The purchase order from your customer
• Your supplier's quote or pro forma invoice
• Information about your customer — who they are and how they pay
• Your margin on the order, and the timeline from order to delivery
• Your own business details and usual documents

Other ways to fund a large order

• BDC offers a purchase order loan for businesses filling confirmed orders.
• A line of credit. If orders like this come regularly, a line of credit is usually cheaper and simpler than financing each one.
• Supplier terms. Asking your supplier for longer terms, or a deposit-and-balance arrangement, costs nothing to ask.
• A customer deposit. Many large customers will pay a deposit on a big order if asked.
• A short-term loan sized against your deposits — see short-term business loans.

The test

PO financing makes sense when the order is real, the customer is good for it, and the margin left after the fee is still worth having. It is a way to take on work you would otherwise have to turn down — and for a growing business, that can be the difference between staying small and getting bigger.