Purchase-order financing for distributors: how it works

Sometimes a large customer order is simply bigger than the cash you can free up, even after tightening terms and chasing receivables. Purchase-order financing is one option for exactly that situation. Instead of borrowing against your own balance sheet, a financier pays your supplier directly against a confirmed order, so you can fulfil business you could not otherwise afford to take on.

This guide is a general explainer of how purchase-order financing typically works, what it usually costs, and who it tends to suit. The mechanics below are common conventions rather than universal rules, and the exact advance, fees and eligibility vary by financier and deal. Importantly, this is background information only, not a recommendation of any product or provider.

How purchase-order financing typically works

The structure is usually straightforward, even if the underwriting behind it is not. The steps commonly run like this:

• You hold a confirmed order. A creditworthy customer places a firm purchase order that you cannot fully fund from cash.
• The financier assesses the deal. Crucially, they look hardest at your end-customer's creditworthiness, since their repayment depends on that customer paying.
• The financier pays your supplier. Often a 70 to 90% advance against the order goes to the supplier, frequently paid directly, so the goods can be produced and shipped.
• The goods are delivered and invoiced. You fulfil the order to your customer in the normal way.
• The customer pays, and the deal settles. That payment repays the financier plus their fees, and you keep the remaining gross profit.

The financing is collateralised on the confirmed purchase order and the end-customer's credit rather than on your assets, which is the feature that makes it accessible to businesses with strong orders but tight cash.

Who it tends to suit

Because the financier leans on the strength of the order and the end-customer rather than your own balance sheet, purchase-order financing tends to suit distributors and trading companies that have solid, confirmed orders from reputable customers but not enough working capital to fund them all at once. A young distributor winning a large order from an established retailer is a classic fit.

It is less suited to situations where the end-customer's credit is weak, where the order is not firmly confirmed, or where margins are too thin to absorb the financing cost and still leave a worthwhile profit. It also tends to work best for finished goods bought to fulfil a specific order, rather than for stock bought speculatively in the hope of selling it later. As with any financing, whether it makes sense depends entirely on the specific deal in front of you.

Costs and eligibility vary

There is no standard price for purchase-order financing, and you should treat any figure you see as indicative only. Costs are typically charged as a fee that scales with how long the financier's money is out, so a deal that takes longer to settle generally costs more. The fee comes out of your gross profit on the order, which is why thin-margin orders are a poor fit.

Eligibility varies just as much. A financier will usually want to see a confirmed order, a creditworthy end-customer, a reliable supplier capable of delivering, and a transaction structure they can verify with documents. They may decline a deal that looks profitable to you if any of those legs is weak. The practical takeaway is to go in with your order, customer credit and supplier all clearly evidenced, and to model the financing cost against your margin before committing.

Where it sits alongside other options

Purchase-order financing is one tool among several for the working-capital gap, and it is not always the cheapest. Before reaching for it, it is worth seeing whether you can close the gap by negotiating a smaller deposit or longer terms with your supplier, by collecting from customers faster, or by simply staging the order. Financing earns its place when the order is genuinely larger than anything those levers can fund.

It is also worth being clear about what it is not. Purchase-order financing is a specialist credit product provided by financiers who underwrite the deal and take the risk. A multi-currency account is a different thing entirely: it is where the money moves through, not the source of the money. Knowing which is which keeps your expectations straight when you set the arrangement up.

How Altery fits

To be completely clear: Altery does not provide purchase-order financing and does not lend. It is not a lender and it is not a bank. Where Altery fits is as the multi-currency account that the financing flows through. When a financier releases an advance, you can receive it into a USD, EUR or GBP balance, then pay your supplier in their own currency through global payouts over SWIFT, SEPA or local rails, without converting twice or settling at whatever rate happens to apply on the day.

When your customer later pays and the deal settles, real-time balances and categorised spend help you reconcile the receipt against the advance, the supplier payment and your remaining gross profit, so the whole transaction is traceable in one place. Multi-entity management and ring-fenced pots let you keep a financed order's money separate from the rest of your cash. This is general information about how purchase-order financing works, not financial advice or an offer of credit.

Frequently asked questions