Perhaps you are looking into alternative financing options for your small business but don’t understand the difference between purchase order financing and invoice factoring. We answer this common question below.
What is Purchase Order Financing?
A good way to tell the difference between purchase order financing and invoice factoring is that the first relates to future sales while the second relates to goods or services already delivered. When your company needs to fulfill a large customer order before receiving any funds from the customer, purchase order financing allows you to buy the supplies you need to fulfill the order. This is a popular financing option for manufacturers, exporters, distributors, and importers.
You must submit a purchase order for future goods from your customer when you apply for purchase order financing. Another potential requirement is a copy of the order you intend to place with a supplier that you need financing to complete.
What is Invoice Factoring?
Factoring an accounts receivable invoice means that you sell invoices to a third party rather than waiting for customers to pay them. This can be a good alternative when cash flow is an issue and you need the funds in less than the 30 to 90 days your customer has to pay. You should select unpaid invoices from only your best customers since the factoring company requests the credit file of the customer named on the invoice.
After running the credit check and approving you for the accounts receivable advance, the factor issues your company a check or sends funds via an automated clearinghouse (ACH) deposit. Keep in mind that you will not receive the full value of the invoice upfront since the factor will deduct its fees. Some factoring companies also put up to 25 percent of the invoice value into an escrow account until receipt of full payment from your customer. If this is the case, you will receive the balance of the escrow account at that time.
Purchase order financing and invoice factoring are just two of the many types of alternative financing options we offer at Spearing Capital & Consulting, Inc. Please contact us today to learn more.