Purchase Order Financing vs. Inventory Financing: What's the Difference?

A supplier has given your business a price for a large order of goods. You have two possible reasons to buy them. Maybe a customer has already agreed to purchase them from you. Or maybe you expect customers to buy them over the coming months, but you do not have signed orders yet.

In both cases, your business needs cash before it collects sales revenue. The difference is what you already know about the sale that will repay the financing.

What is purchase order financing?

A purchase order, often called a PO, is a document from a customer describing the goods they want to buy. It normally states the items, quantities, price and delivery terms. Purchase order financing may help a business pay for the goods or production work needed to fulfill an eligible confirmed order.

A lender or funding provider may review the customer order, your supplier's costs, your company's ability to deliver and the expected payment process. What it finances and how funds move depend on the provider. Some structures pay a supplier directly; others advance funds to the borrowing company. A signed purchase order does not, by itself, guarantee financing.

Learn more about BGC's purchase order financing page. That page explains the product; this guide helps compare the funding decision with buying unsold stock.

What is inventory financing?

Inventory means the goods a business holds to sell or use in making products. Inventory financing can help a company buy or carry eligible stock, even when it does not have a buyer committed to every item.

For this type of request, the lender may care about how quickly stock normally sells, its resale value, how much is already on hand and whether the business can keep paying its bills if sales take longer than expected. Not every type of stock qualifies, and some inventory is difficult to resell or use as security.

Our inventory financing page covers the product's general purpose and borrower considerations.

Two businesses buying goods worth $180,000

Consider two Canadian distributors. Both are thinking about purchases with a selling value of $180,000, but they are taking different risks. These scenarios are illustrative and do not describe actual lender offers or BGC customer files.

Company A has a confirmed customer order. A customer has signed an order to buy products for $180,000 after delivery and acceptance. The distributor needs to pay its supplier $112,000 and expects $9,000 in shipping and handling. Its expected direct costs total $121,000 before other operating costs and financing charges. If the order is completed and the customer pays the full agreed price, the difference before those other costs is $59,000.

That does not mean the company has $59,000 of profit. It may still need to pay sales staff, rent, insurance, taxes and financing costs. The customer might also dispute delivery or pay late. The financing question is whether an eligible confirmed order gives the provider enough support to consider the supplier and delivery costs.

Company B is buying ahead of expected sales. Another distributor wants $120,000 of stock for its warehouse, expecting to sell it gradually over the next six months. It has no signed customer orders covering that purchase. The company needs to show how it expects that stock to sell and how it would manage payments if sales are slower than forecast.

Company B may have a good history of selling similar goods, but the repayment source is less certain because the customers have not yet committed to buy. Inventory age, turnover and resale value may become more important.

Neither case can be approved from these facts alone. The illustration shows why the lender may ask different questions, rather than proving one financing structure is better.

Can the two types of financing overlap?

Yes. A company may use financing connected to a purchase order to buy inventory needed for that order. BDC even lists purchase order financing among the ways businesses can fund inventory purchases. These categories describe related needs and are not always completely separate. ^[1]

What matters is the transaction: has a customer committed to buy, when must you pay your supplier, when will the customer pay you, and what goods will exist if the sale is delayed?

What should you compare before signing?

Ask how much money would be available to your company or supplier, whether the provider requires a deposit from you, and when you would have to start repayment. Confirm all interest, service, draw and administrative fees. A provider may also want rights over inventory or other business assets, so ask what security it requires and what happens if the customer pays late.

For purchase-order financing, confirm what documentation is needed for the buyer, supplier, delivery and customer acceptance. For inventory financing, ask how stock is valued, whether the lender reassesses it and whether the financing limit changes when inventory levels change.

If a lender offers a different type of business loan or a line of credit, compare the full amount you receive, the full amount you repay and when each payment is due. Our guide to comparing financing offers explains that calculation.

Which option may fit your business?

A confirmed order can make purchase-order funding worth exploring if the cash is needed specifically to fulfill that order. Inventory financing can be a more relevant question when a business repeatedly needs to replenish stock before individual customers place orders. Some businesses may need broader working capital financing for several expenses at once.

BGC is a Canadian financing broker, not a direct lender. We review requests and may work with selected funding partners, but each lender sets its own criteria and makes its own decision. If you want to explore financing for a customer order or inventory purchase, start with our application, where you can explain how the money will be used.