How PO Financing Layers on Top of an Existing Credit Facility

Your ABL or revolver handles everyday working capital. But when a large confirmed purchase order lands, the pre-production costs it creates often fall outside your existing facility's borrowing base. Purchase order financing fills that specific gap without replacing or restructuring your credit line. The two facilities coexist through a transaction-specific intercreditor agreement that defines who has priority over what collateral, and when.

This article explains the mechanics: why your existing facility leaves a pre-production gap, how PO financing plugs it, what the intercreditor agreement covers, and what to expect when you bring a PO lender into your capital stack.

Why Your Existing Facility Leaves a Gap

Asset-based lending facilities and revolving credit lines are built around a borrowing base, a formula that determines how much you can draw based on the value of eligible assets. The typical ABL borrowing base includes accounts receivable (advanced at roughly 80–90% of eligible balances) and finished goods inventory (advanced at roughly 50%, according to the OCC's Comptroller's Handbook on Asset-Based Lending).

Here is the problem for growing suppliers. When you receive a large purchase order from a retailer like Walmart, you need to pay suppliers and co-packers before the goods exist. Raw materials and work-in-process inventory have limited liquidation value, so most ABLs either exclude them from the borrowing base or assign advance rates too low to cover the full production cost. According to Gibraltar Business Capital, work-in-process "may be excluded from the collateral used to set your borrowing base" because it "requires more work and time to become salable merchandise."

The result: your credit line maxes out based on assets you already have (receivables and finished goods), while the production costs for a new order sit in a timing gap your facility was not designed to reach.

The pre-production blind spot

Consider a brand supplying Walmart with a $500,000 purchase order. Production and supplier costs total $250,000. If the brand's ABL advances 50% against $200,000 in existing finished goods inventory and 85% against $400,000 in receivables, the borrowing base yields roughly $440,000 in total availability. But that availability is already supporting operations. The incremental $250,000 needed for production on the new PO has no corresponding collateral in the borrowing base until goods are manufactured, shipped, and invoiced.

That is the gap purchase order financing is designed to fill.

How PO Financing Plugs the Pre-Production Gap

Purchase order financing is a short-term, transaction-specific structure. A PO lender pays your suppliers and co-packers directly to produce goods tied to a confirmed retail order. The funding covers cost of goods, freight, duties, and logistics costs necessary to fulfill the order. The lender is repaid when the finished goods ship and the resulting receivables are funded.

According to Paul D. Schuldiner, writing in the Secured Finance Network's The Secured Lender, PO financing "is often a more favorable alternative to giving up equity" for borrowers who need transaction capital beyond their existing lending relationships.

The key distinction from your ABL: PO financing funds the period before assets enter the borrowing base. Your ABL kicks in once receivables and finished goods exist. PO financing covers the costs that create those assets in the first place.

What PO financing does not do

PO financing does not replace your existing credit facility. It does not restructure your debt. It does not give you a general-purpose credit line. It covers production costs tied to a specific, confirmed purchase order and self-liquidates when the transaction closes. This is transaction capital, not revolving capital.

The Intercreditor Agreement: How Two Lenders Coexist

The biggest question brands ask when adding PO financing: "Will my current lender agree to this?" The answer depends on an intercreditor agreement, a contract between your existing lender and the PO funder that defines collateral priority and repayment sequence for each transaction.

Schuldiner notes in his SFNet article that intercreditor agreements "were always the major obstacle in closing a purchase order financing deal" because senior lenders worried the PO funder was "usurping the senior lender's collateral position." In practice, the opposite is true. The PO funder asks the senior lender to subordinate only on the specific purchase orders and the collateral created through the PO financing. The senior lender's existing collateral position remains intact.

How the agreement works in practice

1. You receive a confirmed PO from a creditworthy retailer (e.g., Walmart).

2. The PO lender funds supplier and production costs directly to your manufacturers.

3. Once goods ship and you invoice the retailer, the resulting receivables enter your ABL's borrowing base.

4. Your ABL or factor advances against those new receivables, and the first use of that advance pays off the PO lender.

5. The PO lender subordinates its security interest back to the senior lender once it is repaid.

As Schuldiner explains, "purchase order funders typically prefer senior lenders to advance on the receivables in order to pay off the financing, and then the funder subordinates the security interest back to the senior lender upon receipt of the advance on the newly created accounts."

This cycle, where PO financing creates the collateral that the ABL then advances against, is why the two structures complement rather than conflict. The senior lender's collateral pool actually grows because the PO financing generates new receivables.

What the intercreditor agreement typically covers

Unlike intercreditor agreements in the second-lien lending market, a PO financing intercreditor agreement is "transaction-driven, with a clear start and finish," according to Schuldiner's SFNet analysis. The agreement activates when a PO is funded and terminates when the PO lender is repaid.

What Changes (and What Doesn't) in Your Existing Facility

Adding PO financing does not alter the core terms of your ABL or revolver. Your borrowing base formula, advance rates, covenants, and interest rate stay the same. What changes is a narrow consent: your senior lender agrees to let the PO funder hold a priority position on the specific collateral (purchase orders and resulting inventory) tied to funded transactions.

What stays the same

• Your ABL borrowing base formula and eligible asset definitions

• Advance rates on existing receivables and inventory

• Financial covenants and reporting requirements

• Your available credit for day-to-day operations

What changes

• Your senior lender provides consent for the PO lender to operate alongside the facility

• A collateral carve-out applies to funded purchase orders only

• New receivables generated from PO-financed transactions flow through the ABL after the PO lender is repaid

• You may have additional reporting obligations to keep both lenders informed

Many ABL agreements include a covenant requiring the borrower to get consent before taking on additional secured debt. That covenant is exactly what the intercreditor agreement addresses. As the OCC's Comptroller's Handbook notes, ABL lenders "may not object to other types of borrowing" and "may be comfortable with another lender providing specialized financing" when the arrangement is properly documented.

When Layering Makes Sense

PO financing layered on an existing facility works best in specific situations. Not every brand needs it, and not every deal structure supports it.

Good candidates for layering

• Growth-stage suppliers with large retail orders. A $500,000 Walmart PO creates production costs that exceed available ABL capacity. PO financing covers the gap without forcing the brand to use equity or operating cash.

• Brands with seasonal demand spikes. Holiday or back-to-school orders can temporarily exceed the borrowing base. PO financing handles the surge without permanently increasing the ABL commitment.

• Companies entering new retail channels. First orders with new retailers carry production costs before any receivables exist. PO financing funds the entry without tying up the existing facility.

• Businesses where the ABL is already near capacity. If your borrowing base is fully drawn, PO financing adds incremental capacity tied to specific transactions.

When layering may not fit

• If your ABL has excess availability and your lender will advance against purchase orders or raw materials, you may not need a separate PO facility.

• If the order is too small to justify the cost and coordination of a second lender relationship, using operating cash may be simpler.

• If your senior lender will not consent. Some lenders resist intercreditor arrangements. In that case, you may need to renegotiate terms or evaluate whether your current facility still fits your growth stage.

How to Get Started

If you supply Walmart or Sam's Club and a confirmed purchase order is creating a production funding gap, Bridge can help. Bridge is the direct lender for Walmart-focused purchase order financing, funding up to 100% of COGS on approved transactions, subject to underwriting.

Here is what to prepare:

1. Gather your confirmed purchase order from the retailer.

2. Pull your current ABL or facility agreement, including any negative pledge or additional debt covenants.

3. Document your supplier and production cost breakdown for the specific order.

4. Identify your current lender contact for the intercreditor conversation.

Bridge coordinates the intercreditor process with your existing lender, so the two facilities work together from the start. The goal: fund production, preserve your operating cash, and keep your existing credit line working for the rest of the business.

Request financing to start the conversation.

FAQs

Does PO financing replace my existing credit facility?

• No. PO financing operates alongside your ABL or revolver. It covers pre-production costs tied to a specific purchase order, while your existing facility continues to advance against receivables and finished goods as it normally does.

Will my current lender need to approve the PO financing arrangement?

• In most cases, yes. ABL agreements typically include covenants requiring consent before taking on additional secured debt. The intercreditor agreement between lenders addresses this by defining collateral priority and ensuring the senior lender's position on existing assets remains intact.

How does the PO lender get repaid?

• When the funded goods ship and you invoice the retailer, those new receivables enter your ABL borrowing base. Your ABL advances against the receivables, and the first disbursement pays off the PO lender. The PO lender then subordinates its security interest back to the senior lender.

Does Bridge fund 100% of production costs?

• Bridge funds up to 100% of COGS on approved transactions, subject to underwriting. The actual funding amount depends on factors including supplier credibility, margins, fulfillment plan, and the creditworthiness of the retail buyer.

What if my current lender refuses to sign an intercreditor agreement?

• Some lenders resist intercreditor arrangements. If your current lender will not consent, it may indicate the facility terms no longer match your growth needs. Bridge can help you evaluate whether a restructured facility or alternative capital stack would better support your order volume.

Is PO financing the same as early payment or invoice factoring?

• No. Early payment programs and invoice factoring accelerate cash after goods are delivered and invoiced. PO financing covers the production and supplier costs that arise before fulfillment. They address different parts of the cash cycle and can work together in sequence: PO financing funds production, then factoring or ABL advances accelerate payment once the invoice exists.