Purchase Order Financing vs. Invoice Factoring

paper and calculatorMany people are confused about the difference between purchase order financing and invoice factoring. Although they both are designed to help businesses outpace their income revenues, they provide different benefits.

If your business is in need of financing to secure a strong source of capital, it’s important to identify which is the right option for you. We are going to break down each of these financial services to help you choose which is the right option for you and your business.

Purchase Order Financing

Purchase order financing is a funding option for businesses that need funding for multiple or single customer orders. This is a transaction, rather than a type of loan. It involves one company paying a supplier for goods that the company needs to fulfill an order for a client. The company receives a cash advance that can cover some or all of the amount of supplies needed for the job.

The financing company will collect the invoice from the end customer. The financing company takes fees out of the collected invoice to pay for this transaction, and after the order has been fulfilled, the remaining amount is returned to the company.

To qualify for purchase order financing, your business needs a minimum of:

  • Creditworthy supplier and customer
  • Gross margins must be 30% or higher
  • Must be B2B
  • Must sell tangible goods

Invoice Factoring

Invoice factoring is the process of selling your business’s outstanding invoices to a factoring company. The factoring company gives you up to 96% of the invoice amount in just 24 hours or less. The company collects the invoice amount, and deducts a fee out of the invoice as their payment.

Factoring companies that use non-recourse invoice factoring, like us, take 100% of the risk if the business’s clients fail to pay their invoices. This offers you complete credit insurance.

This helps businesses that offer 30 to 90 day payment terms to their customers that may use invoice factoring to get faster payment for their services.

Many fast-growing businesses often reach a point where their outgoing sales are more than their incoming revenue, creating a negative impact on cash flow and customer service. Both of these services offer a way for businesses to catch up with their growth.

Their Differences

Timing

One of the main differences between these services is when they are used. Purchase order financing is used only for business that sell tangible goods and is used before anything is actually sold. With invoice factoring, any business that sells either products or services can use this financial service and at any time after the invoice has been dispatched.

Amount of Funds

With invoice factoring, you only get funds that are already owed to your business. This allows you to take on the right amount, without having to think.

Purchase order financing gives you a cash advance of money that you have not yet owned to your business. The purchase order financing company provides access to a large amount of working capital, depending on the number of purchase orders you make available.

We hope that this comparison has helped you understand the differences between these alternative financing options.

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About the Author:

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty five years. Mr. Bernfeld established both equipment leasing and accounts receivable factoring companies.He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.

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