Purchase Order Finance in India: Fund Your Orders Before You Produce

You have just landed a big order. The problem is you do not have enough cash to buy the raw materials and start production before you get paid. This is one of the most common cash flow problems in B2B businesses, and purchase order (PO) finance was built to solve exactly this.

Here is how PO finance works in India, what it costs, and how to access it.

What Is Purchase Order Finance?

Purchase order finance (also called PO funding) is a short-term cash advance against a confirmed purchase order from a creditworthy buyer. The lender advances 60 to 80% of the PO value to you (or directly to your supplier), which you use to fulfill the order. When the buyer pays, you repay the lender.

Unlike invoice discounting (which funds invoices after delivery), PO finance funds the order before production and delivery. This makes it useful for manufacturers, traders, and distributors who have large individual orders but thin working capital.

How PO Finance Works

1. You receive a confirmed PO from a creditworthy buyer for Rs 50 lakh.
2. You submit the PO to your lender and request financing.
3. The lender advances Rs 35 to 40 lakh (70 to 80% of the PO value) to your raw material supplier or to your account.
4. You produce and deliver the goods, then raise an invoice to the buyer.
5. The buyer pays the invoice amount to the lender’s escrow account.
6. The lender deducts its fee and releases the balance to you.

Interest Rates and Costs

Lender Type	Interest Rate (per annum)	Advance Rate on PO
PSU Banks (SBI, Bank of Baroda)	10.00% to 14.00%	Up to 80%
Private Banks (ICICI, Axis, HDFC)	13.00% to 19.00%	Up to 75%
NBFCs (Drip Capital, KredX)	14.00% to 24.00%	Up to 80%

The cost depends on the buyer’s credit quality, the PO size, and your own business profile. Orders from large government bodies (PSUs) or listed corporates command better rates because lenders see these as low-risk.

Eligibility

• Confirmed purchase order from a creditworthy buyer (government, PSU, listed corporate, or reputed private company).
• Your business must have the operational capacity to fulfill the order.
• Business vintage of at least 1 year preferred.
• No existing major defaults on credit facilities.

Documents Required

• Original purchase order from the buyer (signed and stamped)
• Buyer’s profile and contact details
• Pro-forma invoice or supplier quote for raw materials
• Business registration documents and GST certificate
• Bank statements for the last 6 months
• KYC of the business owner
• Past order fulfillment records (if available)

Application Process

1. Verify that your buyer qualifies. The lender’s primary credit assessment is on your buyer, not you. Government and PSU buyers have the fastest approval.
2. Approach NBFCs if the bank process is too slow. NBFCs like Drip Capital (for exporters) and KredX offer faster processing than traditional banks for PO finance.
3. Provide a clear fulfillment plan. The lender wants to know how you will produce and deliver within the PO timeline. A production schedule or supplier confirmation helps.
4. Funds are disbursed to your supplier or your account. Often, the lender pays your raw material supplier directly to ensure the money is used for order fulfillment.
5. Repayment happens from buyer payment. The buyer’s payment is directed to a designated account held by the lender. Your margin is released after the lender’s fee is deducted.

PO Finance vs Working Capital Loan

A working capital loan gives you a revolving credit line tied to your general business. PO finance is transaction-specific: each PO is a separate facility. PO finance is ideal for businesses with lumpy, large orders, while working capital loans suit businesses with steady daily operations.

FAQ

Can I get PO finance for an export order?

Yes. In fact, export PO finance is well-developed in India. Banks offer pre-shipment credit (Packing Credit in Foreign Currency or PCFC) for export orders under RBI’s export credit norms, often at lower rates than domestic PO finance.

What if I cannot fulfill the purchase order after receiving the finance?

If you cannot deliver, you are still obligated to repay the advance. The lender may allow a restructuring if the delay is genuine, but outright failure to deliver is treated as a default. Ensure you have the operational capacity before applying.

Is PO finance available for orders below Rs 10 lakh?

Most banks and large NBFCs have minimum PO size thresholds of Rs 25 lakh to Rs 50 lakh because the processing cost does not justify smaller deals. For smaller orders, working capital loans or MUDRA are more practical options.