It often happens that a small business has an order for a product or service that is too big for it to fulfill, because to do so would require more cash than the company can borrow from a bank.  For those situations that qualify, the funds are advanced to fulfill the purchase order and a factoring lender will receive the customer's payment.  The company thereby makes a substantial profit it would otherwise not have made.

In purchase order financing, the lender puts up the initial capital needed and usually requires that the merchant's profit margin on the purchase order transaction be 40 to 50%.The lender will also look at the merchant's history of delivering goods or products on time and any previous history of dealings with the end receiver of the goods or products.Purchase order financing is a great tool that many businesses use to expand their business and profit. This type of financing is frequently used in combination with other types of business financing to create bigger transactions than the business could have handled.