Purchase Order Finance in NZ: How It Works and When It Fits
Purchase order finance is short-term funding that pays your supplier so you can fill a confirmed order from your own customer. The lender looks mainly at that customer order and your supplier, not just your balance sheet. Once you deliver and your customer pays, the lender takes its money and fees and you keep the margin. In New Zealand it is usually offered as part of trade finance, often for imported goods.
How Purchase Order Finance Works, Step by Step
- Your customer sends you a purchase order. For example, a retail chain orders 2,000 units from you for delivery in eight weeks.
- You need to pay your supplier first. Your manufacturer wants a deposit, or full payment before it ships.
- The lender checks the deal. It looks at how reliable your customer is, whether your supplier can deliver, and whether your margin covers the fees.
- The lender pays your supplier directly. Sometimes that's by bank transfer, and for imports it can be through a letter of credit.
- You deliver and invoice your customer. Your customer pays on their normal terms, or the invoice is moved onto an invoice finance facility.
- The lender is repaid. It deducts what it advanced plus fees, and the balance comes to you.
The important detail is in step one: purchase order finance is built around a confirmed order from a customer. It suits a business that resells goods it has already sold. It doesn't suit buying stock to sell later to walk-in or online customers, because there is no purchase order for a lender to rely on.
A Worked Example
Illustrative figures: an Auckland homewares distributor wins a $90,000 (excluding GST) order from a national retailer. The goods cost $60,000 from its manufacturer, which wants 30% on order and 70% before shipping. The retailer pays 60 days after delivery.
| Step | Timing | Cash out or in |
|---|---|---|
| Deposit to manufacturer (funded) | Week 0 | $18,000 paid by the lender |
| Balance before shipping (funded) | Week 6 | $42,000 paid by the lender |
| Goods delivered, retailer invoiced | Week 10 | $90,000 invoice issued |
| Retailer pays | Week 19 | $90,000 received; lender repaid $60,000 plus fees |
If the lender charges an illustrative 3% of the funded amount per month, and the money is out for about three and a half months on average, fees come to roughly $60,000 × 3% × 3.5 = $6,300. That still leaves the distributor about $23,700 of gross margin on a deal it could not otherwise have taken. If the margin had been 15% rather than 33%, fees would have taken around half of it. That's why lenders usually look for healthy margins before they agree.
Purchase Order Finance vs Trade Finance vs Invoice Finance
These three get mixed up constantly. They fund different points in the same deal.
| Product | What it funds | Based on | When it's used |
|---|---|---|---|
| Purchase order finance | Paying your supplier to fill an order you've already won | Your customer's purchase order | Before you deliver |
| Trade finance (imports) | Paying an overseas or local supplier for a specific shipment | Your purchase order to the supplier and the shipping documents | Before and during shipping |
| Inventory finance | Stock you will sell over time | The value of the stock itself | While the stock sits on your shelves |
| Invoice finance | Cash against invoices you have already issued | Your unpaid customer invoices | After you deliver |
| Supplier invoice instalments | One supplier invoice, repaid monthly | Your business and the invoice in front of you | When the supplier invoice is due |
In practice, NZ banks and some non-bank lenders offer trade finance loans for imports, tied to a specific purchase order and its shipping documents. True purchase order finance, where the lender relies on your customer's order, is a narrower product. A lender often pairs it with invoice finance so the invoice you raise at delivery repays the original advance.
Pros, Limits and Who It Suits
Where it helps
- You can take on an order bigger than your cash or overdraft would normally allow.
- Approval leans on your customer's strength, which helps a young business that has landed a large, reliable customer.
- It's tied to one deal, so it doesn't sit on your books as an open-ended loan.
Where it falls short
- It's expensive per month compared with bank lending, so thin-margin products struggle to carry it.
- You need a confirmed customer order. Stock bought on forecast doesn't qualify.
- Lenders check your supplier too, and a new or unproven supplier can sink the application.
- Most providers want deals above a minimum size, and setting one up takes time. It rarely suits an order due next week.
It suits distributors, importers and resellers who have won a large order from a creditworthy customer and have good margins. A retailer, builder or online brand buying stock for future sales usually needs one of the options covered in the Stock Finance guide instead.
Alternatives When Purchase Order Finance Doesn't Fit
- Ask your customer for a deposit. Large retail and project customers sometimes pay part upfront on a custom or bulk order. It costs nothing, but you have to ask.
- Negotiate supplier terms. A supplier you already trade with may split the payment or give you longer terms on a large order. See how to negotiate payment terms with suppliers.
- Use an overdraft or a short-term loan. These are cheaper per month if you can get them, but often need security.
- Pay the supplier invoice in instalments. If your supplier is an NZ business and has already issued an invoice, a provider can pay that supplier in full while you repay over a few months. This doesn't need your customer's purchase order. See how to finance a large supplier invoice.
Frequently Asked Questions
What is purchase order financing?
Purchase order financing is funding that pays your supplier so you can fulfil a confirmed order from your own customer. The lender is repaid when your customer pays, and it charges fees for the time its money is out.
Is purchase order finance available in New Zealand?
Yes, mostly through trade finance. NZ banks and some non bank lenders fund purchase orders for imported goods, and a few specialist lenders fund deals based on a customer's purchase order. Availability depends on the size of the deal, your margin and your customer.
How much does purchase order finance cost?
It is usually priced as a fee per month or part month on the amount advanced, plus setup costs. It costs more per month than a bank overdraft, so check that your margin on the order comfortably covers the fees for the full time the money is out.
What is the difference between purchase order finance and invoice finance?
Purchase order finance pays your supplier before you deliver. Invoice finance advances cash against invoices you have already sent to customers after delivery. Many lenders use the two together on the same deal.
Can I get purchase order finance without a customer order?
Not usually. Without a confirmed customer order there is nothing for the lender to rely on. If you are buying stock to sell later, look at supplier terms, an overdraft, inventory finance or paying the supplier invoice in instalments instead.
