Purchase order finance not only delivers high commissions—it opens the door to long-term factoring relationships with manufacturing and distribution clients.
For most brokers, developing new factoring client submissions will make up the majority of their early income. Factoring is, after all, the foundation of the independent commercial finance consulting business. However, there’s another essential product line every professional broker should understand—Purchase Order Finance (often called PO Finance).
What is Purchase Order Finance?
As the name implies, purchase order finance provides capital to fulfill large customer orders that exceed a company’s available cash or inventory. It’s commonly used when a smaller supplier receives a significant purchase order from a larger company but lacks the resources to fulfill it. PO finance allows that smaller business to accept and complete the order by securing short-term funding for materials, manufacturing, or outsourcing production.
How It Works: The ABC Company Example
Let’s look at a simplified example.
ABC Small Co., a U.S.-based company, receives a $500,000 purchase order from XYZ Big Co. on October 25th for its popular holiday widget. The order must be delivered at least 60 days before Christmas so XYZ can stock it in its stores nationwide.
The problem?
ABC only has $100,000 worth of widgets in stock and will need to manufacture an additional $400,000 to fill the order. Their overseas contract manufacturer in China quotes $150,000 to produce and ship the additional units.
ABC has only $50,000 in cash—not enough to cover the cost—and their bank refuses to fund international purchase order payments. Losing the order could mean missing out on not only major holiday revenue but also a long-term relationship with a large national retailer.
Enter Purchase Order Finance.
A factor specializing in PO finance issues a $100,000 letter of credit to ABC’s Chinese manufacturer. Once production is completed, inspected, and shipped, the letter of credit pays out—allowing the goods to be delivered on time to XYZ Big Co.
Once the shipment arrives, the $500,000 invoice to XYZ can be factored immediately, providing ABC with the working capital needed to replenish inventory and continue normal operations.
In this example, the broker who brought the deal to the factor earns a substantial commission on both the PO financing and the follow-up factoring arrangement—a true win-win.
Why PO Finance Is a Smart Move for Brokers
For new and experienced factoring brokers alike, developing a working knowledge of purchase order finance is a strategic advantage.
Here’s why:
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High Commission Potential: Purchase orders are often large, leading to generous broker fees.
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Natural Cross-Sell to Factoring: Once a PO is completed, the resulting invoice can be factored, doubling your commission potential.
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Expands Your Market Reach: PO finance allows brokers to market to small manufacturers, importers, and distributors, especially those using overseas contract manufacturers in Asia and the Pacific Rim.
PO finance and factoring go hand-in-hand. Understanding both allows brokers to present themselves as true problem solvers for small business clients—professionals who can provide funding solutions for nearly every stage of the supply chain.
Learning More. Training and Resources
For IACFB members, the Academy’s advanced training modules include a dedicated class on Purchase Order Finance—covering deal structures, documentation, and risk management for brokers targeting manufacturing and distribution sectors.
Building confidence in this area can transform your practice. It not only strengthens your client relationships but also gives you access to larger, more profitable transactions—and a clear path to expanding your role as a full-service commercial finance consultant.