Tag: financing

Financing refers to the funding of a business.

Lease vs Buy a Car or Commercial Vehicle: Which is Right for You?
Is it better to lease vs. buy a car or commercial vehicle? People have been asking this question since leasing first became a viable option in the 1930s. Around a quarter of new vehicle financing, today is applied to leases, according to Experian. Yet, the answer isn’t quite so clear-cut and will differ depending on your current status and needs. We’ll give an overview of key differences, benefits, and drawbacks of leasing a car vs. buying below, so it’s easier to see what’s right for you.

What is the Difference Between Leasing and Buying a Car?

Both leasing and buying can provide you with a vehicle, but the agreements, terms, and fees are structured differently.

Car Leasing

Car leasing is usually similar to renting. We’ll go over the pros and cons in just a moment, but let’s start with a crash course in leasing terminology since it’s different from what most are accustomed to.
- Residual Value: Vehicles lose value over time and as wear and tear occur. Residual value refers to the vehicle’s value at the end of the lease. The shorter the lease, the greater the residual value is.
- Term Length: A lease is similar to a term length with a loan. It’s the total length of the agreement or the amount of time you’ll make payments. Short-term options are generally more expensive because the residual value decreases fastest during the first 24 months.
- Estimated Annual Mileage: Depending on your lease type, you may be asked to estimate how many miles you intend to drive annually.
- Capitalized Cost: Also referred to as “cap cost,” the capitalized cost is the price of the vehicle. The cap cost is usually fixed when the manufacturer sponsors the lease, though it can be negotiated in other cases.
- Cap Cost Reduction: Any discounts, such as lease deals from the automaker, are referred to as a cap cost reduction.
- Money Factor: Rather than calculate with interest rates, leases use a “money factor.” To calculate your APR, multiply your money factor by 2,400.
- Closed-End Lease: “Closed-end” leases are what most people think of when they hear the term “lease.” With these agreements, all the numbers are calculated in advance. As long as the vehicle is returned in the condition expected, when it’s expected, and with the anticipated mileage, it tends to be a very predictable process. The lessee doesn’t assume depreciation risk when the term ends.
- Open-End Lease: An open-end lease is more flexible. However, the lessee accepts more risk in an open-end lease because they agree to pay the difference between the estimated residual value and actual resale value at the end of the lease. Most businesses opt for an open-end lease over a closed-end lease because they tend to rack up miles, and it’s often less expensive to pay a difference in value than it is to pay a fee for mileage overages.
Buying a Vehicle

When most people talk about buying a car or commercial vehicle, they’re not generally talking about purchasing it with cash. Instead, they’re talking about taking out an auto loan to cover the cost. Nearly nine in ten adults have done just this, according to The Zebra, so we won’t go over this in too much depth.

When you finance a vehicle, you own it outright once your final lease payment is made. So while fees and interest are tacked onto the loan, you’re probably accustomed to the structure and terms offered.

What Are the Advantages of Leasing a Vehicle?

There are many benefits of choosing a lease vs. finance, whether you’re searching for business or personal use.

Lower Monthly Payments

You’ll almost always have lower monthly payments if you’re leasing. A typical lease is $506 per month, and a vehicle loan is $617, according to Experian research.

Free Up Cash Flow for Your Business (if Leasing a Company Car)

Experian’s figures are largely based on consumer shopping. As a business owner, you’ll likely have considerably more cash to put toward expenses and growth each month if you lease your business vehicles.

Latest Technology

Leases rose to fame because commercial enterprises needed to upgrade equipment every 12 months to have the latest tech.

Warranty Coverage and Maintenance

Most leases include all your maintenance and a warranty. That means lower expenses and fewer headaches for you.

It’s Easy to Trade Your Leased Vehicle In

By design, leases make it easy to trade the vehicle in at the end of your term.

Sales Tax Reduction

You have to pay sales tax on the full purchase price of a vehicle when you finance it. However, some jurisdictions only charge sales tax when you lease on the down payment and the contracted monthly payments.

Little or No Down Payment

Many leases don’t require a down payment or only have a small upfront cost. Although this can increase the monthly costs, it’s helpful for those shopping on a tight budget.

What Are the Disadvantages of Leasing a Vehicle?

Even though there are many advantages of leasing a vehicle, there are some disadvantages too. Let’s take a look.

You Don’t Own the Vehicle

Although some leases give you the option to purchase the vehicle at the end of the term, it’s not the norm. Instead, you have to give the vehicle back when your agreement ends.

You Always Have a Car Payment

When you take out an auto loan, you only make payments until the vehicle is paid off. Once you’re done, you’re done. Because leases aren’t intended to pay off a vehicle, you’ll always be making payments.

There’s a Mileage Limit

Estimated annual mileage can be a killer for people and businesses that drive a lot.

You Won’t Have Cash for Your Next Car

If you keep making payments on an auto loan, your vehicle will be worth more than you owe at some point. Known as “trade-in value,” this can help you put a serious dent in the amount you need to borrow for your next vehicle. With a lease, you don’t own the vehicle, so you can’t put your investment toward your next purchase.

Unexpected Lease-End Costs

Excess mileage charges can be hard to swallow. Sometimes leasing companies nickel and dime you for excessive wear and tear too.

Usage Restrictions

Again, you don’t own a car you’re leasing. That means the leasing company can stipulate you aren’t allowed to leave the country with the vehicle or may restrict you from using it in certain ways, such as operating as a Lyft or Uber driver.

You Need Gap Insurance

Gap insurance is insurance that pays off the balance of the vehicle in the event it’s declared a total loss or stolen. Some lenders require this with traditional auto loans because it protects their investment. Especially in the first 24 months, you owe more than the car is worth. Virtually all leasing companies require gap insurance for the same reason.

Leasing Can Be Difficult, Especially if You Have Bad Credit

Subprime borrowers, or those with a FICO Score below 670, only account for around 13 percent of vehicle lease balances, according to Equifax. While it’s technically possible to qualify for a lease with bad credit, the terms offered will not be great.

Lease Deals Are Limited

More often than not, leases are only offered to shoppers with excellent credit, though sometimes automakers will make additional lease options available when sales are lagging.

You Can’t Get Repairs Done Anywhere

Even though maintenance is covered, you’re at the mercy of the leasing company’s network for all maintenance and repairs. Unfortunately, that usually means returning to the dealership for repairs, typically increasing costs for non-covered items.

You Have to Return the Car in Great Shape

Generally speaking, leasing companies use the “credit card test.” If a scratch or scuff is smaller than a credit card, you’ll get a pass on the damage when the lease ends. However, this doesn’t necessarily extend to glass and interiors, and it’s not a hard rule. If the vehicle is returned with any damage, wear, or tear that the leasing company deems is not normal for the period of time you’ve had the vehicle, you’ll get hit with additional fees.

It’s a Binding Contract

Even though leases only last a short time, the consequences of violating your agreement can stick with you and on your credit report for years to come.

What Are the Benefits of Buying a Vehicle?

Now that we’ve covered the benefits and drawbacks of leasing a car vs. buying let’s take a look at it from the buying side.

You Own the Vehicle

Whether you purchase it outright or make payments, once the vehicle is paid in full, it’s yours to do with as you wish.

You Are Creating an Asset for Your Balance Sheet

Any value in a vehicle you’ve purchased is yours. It counts as a personal or business asset, which means you can use it to demonstrate financial strength or as collateral on a loan.

Your Business Can Claim Depreciation on Taxes

If you are weighing the pros and cons to decide whether you should buy or lease a car for your business, tax benefits are an important consideration. Because you own the asset, you can also claim any depreciation on your taxes. Combined, businesses can claim over $1 million on equipment, according to IRS Section 179.

Where, When, And How far You Drive Are Your Choices

As long as it’s legal, you can take a vehicle you own anywhere you wish, whether it’s next door, Mexico, or Canada.

You Can Get Cash to Pay for Your Next Car

The equity in your vehicle is yours, so you can roll it into your next vehicle if you wish.

You Can Customize Your Vehicle However You Choose

Vehicles earmarked for leases are cookie-cutter cars. If you want any kind of upgrades or custom accessories, purchasing a vehicle is the way to go.

Once Your Loan is Paid Off, There Are No More Payments

Whereas you’re tied into payments as long as you’re leasing, you don’t have payments once your vehicle is paid off if you buy it.

You Can Sell on Your Own Schedule

Whether you want to trade your vehicle in after six months or 12 years, it’s totally up to you when you buy.

Financing for a Purchase Is Easier Than Leasing

There’s less risk for funding companies when they’re selling a vehicle than leasing one, so they can typically work with individuals and businesses with light credit files or bad credit.

Refinancing Can Save You Money Down the Road

When you lease, your monthly payment is your monthly payment for as long as the term lasts. However, if interest rates drop after you buy or you do major credit repair/ building, you can refinance to get better terms and save money.

What Are the Disadvantages of Buying?

Even though buying a vehicle has many advantages, there are some challenges or drawbacks associated with purchasing too.

Buying a Car is More Expensive in the Short Term

Your monthly payments will generally be higher if you’re purchasing. Expect to make a down payment too.

You Pay Interest on the Entire Cost of the Car

True, leasing uses a money factor instead of interest, but the general concept applies – you’re only paying toward what you owe. With a loan, you’re paying interest on the full amount borrowed instead of a portion of the vehicle.

You May Have to Pay More Sales Tax

While you can escape some sales tax in certain jurisdictions, you’re on the hook for the full amount when you purchase.

The Car’s Future Value Is Unknown

Compared to a closed-end lease, purchasing a vehicle is riskier. You take the hit if the vehicle depreciates dramatically.

The Warranty Will End

Vehicle warranties only last a couple of years. Once the warranty ends, you’re responsible for handling all repairs.

Lease vs. Buy a Car: The Main Things to Consider

Now that we’ve covered all the benefits and drawbacks, what really matters when deciding whether to lease vs. buy a car?

How Much Does it Really Cost on a Monthly Basis?
- Monthly Payments: Consider your full monthly payment to the leasing company or lender.
- Car Insurance: Leasing companies often require lessees to maintain high coverage levels. If you wouldn’t normally maintain high tiers, leasing can increase your monthly payments overall.
What Are the Overall Costs?
- Down Payment: Leases generally require a lower down payment than loans.
- Interest: Your APR will usually be higher with a lease.
- Repairs: Repairs are yours to cover when you purchase.
- Depreciation: You take the depreciation hit with a purchase and may be unexpectedly saddled with additional depreciation-related fees with some leases.
- Leasing Fees: Each leasing company charges different fees. Make sure you understand all your charges before signing an agreement.
Flexibility

Purchasing an open-ended lease is probably better if you crave flexibility, but remember that you’re assuming more risk with these options.

Mileage for Businesses that Do Long Distances

If you plan to drive a lot, purchasing the vehicle may be more cost-effective, or opt for an open-ended lease.

Owning vs. Leasing a Car: Which is Right for You?

The lease vs. buying a car debate has no wrong or right. It’s a matter of choosing what’s right for you or your business. Use the information outlined here to make an informed decision that will serve you well today and in the coming years.

Charter Capital Can Help Whether You Want to Own or Lease

Are slow-paying clients standing between you and the vehicle you need to expand your business? Maybe you’d like a down payment, want to bridge a cash flow gap without taking on debt, or want to take on more work but don’t have the working capital to cover the expense? Charter Capital can help by unlocking the cash trapped in your unpaid B2B invoices through invoice factoring. Contact us for a complimentary quote.

Is buying a car better than leasing?

The lease vs. buying a car debate has no wrong or right. It’s a matter of choosing what’s right for you or your business. Use the information outlined here to make an informed decision.

Is it financially smart to lease a car?

When you take out an auto loan, you only make payments until the vehicle is paid off. Once you’re done, you’re done. Because leases aren’t intended to pay off a vehicle, you’ll always be making payments.

What are the disadvantages of leasing a car?

Disadvantages of Leasing a Vehicle:
• You don’t own the vehicle
• You always have a car payment
• There’s a mileage limit
• You won’t have cash for your next car
• There are usage restrictions
• You need gap insurance
• Lease deals are limited
• You can’t get repairs done anywhere
• You have to return the car in great shape
August 18, 2022
Heavy Equipment Financing: A Beginner’s Guide to Getting Funding
Need to make a large equipment purchase but not sure where to start or if you’ll even qualify? Heavy equipment financing can help you do just this, but there are many ways to approach it. We’ll walk you through some of the most common solutions and alternatives on this page so that you can make the right decision for your business.

Leasing vs Financing for Heavy Equipment

When you finance your heavy equipment, you own it. It’s yours until you decide you’re done with it. When you lease heavy equipment, it’s not yours. You’re borrowing it for the duration of your lease, though some leases offer the option to buy when the term is over.

There are two main types of equipment leasing: capital and operating.
- Capital Lease: Intended for long-term access to equipment.
- Operating Lease: Intended for short-term access to equipment.
Is Financing or Leasing Business Equipment Better?

Financing is usually better if your company’s cash flow is strong, you plan to keep the equipment for an extended period, and the equipment will help you generate revenue.

Leasing is generally better if you won’t need the equipment long or it will become obsolete quickly. It can be better if you’re short on cash or are not a strong borrower yet too, though there are alternative funding methods we’ll cover at the end that can help if these latter concerns are holding you back.

What You Need to Qualify for Heavy Equipment Financing

Finding traditional equipment funding for a small business isn’t always easy. Borrowers usually need to meet specific criteria for credit scores, cash flow, and time in business. Collateral may come into play as well.

Time in Business Requirements

Companies usually need to be in business for at least one year to qualify for traditional equipment funding.

Credit Score Requirements

Most financial institutions offering heavy equipment financing require a minimum credit score of 600, though some start at around 550.

Cash Flow Requirements

Most businesses will need $100,000 in annual revenue to qualify for an equipment loan, though some lenders start at around $50,000. The amount will vary depending on the total amount of funds requested too.

Down Payment Requirements

Most equipment loans require the borrower to put down 20 percent of the initial cost. For example, if you’re purchasing a $100,000 truck, you’ll need to have $20,000 for your down payment. Well-qualified borrowers can sometimes receive a bit more.

Do You Need Collateral?

One of the primary things that distinguish heavy equipment loans from traditional loans is that equipment loans usually leverage the equipment being purchased as collateral. It secures the loan and offers the lender a measure of assurance that they’ll be able to recoup their money if the borrower doesn’t pay. Sometimes lenders will have borrowers sign a personal guarantee and leverage other business or personal assets as collateral as well. It’s usually easier to qualify for an equipment loan than it is to qualify for a traditional non-specific business loan for these reasons.

Can You Get Heavy Equipment Financing if You Have Bad Credit?

Again, the minimum credit score required for an equipment loan is usually 600. This is considered a “fair credit score,” according to Experian. “Poor” credit is a score of 579 or lower. So, although it’s technically possible to get heavy equipment financing with bad credit, it’s unlikely. You also won’t get good terms like you might if you have a score of 740 or more, which is “very good” credit, or 800 or more, which is “exceptional” credit. If you fall into this bracket, you’ll likely want to explore the non-traditional options covered at the end.

Costs and Terms of Heavy Equipment Financing

At this point, you should have a good idea of whether you’ll qualify for heavy equipment financing. Let’s go over what you can expect in terms of repayment and costs.

What Are the Repayment Terms?

Equipment loans are generally term loans, meaning you’ll repay the principal, interest, and fees in installments over a set period. Anywhere from one to five years is common, depending on the amount borrowed and your qualifications, though some offer up to ten-year repayment terms.

How Much Can You Finance?

Heavy equipment loans are designed to finance the total cost of equipment minus your down payment, so some will offer loans well into the millions. It’s similar to how a car loan works. If you’re well-qualified, you can take out a loan that covers all but your down payment for just about any type of car, whether it’s a $5,000 budget car or a $50,000 sports car. Your down payment addresses the immediate depreciation, so if you default on the loan, the loan company can resell the car and recoup any losses.

It becomes a little trickier when your financing company doesn’t understand the value of what you’re purchasing. For example, you may know your “new car” is worth $50,000 because it’s electric, but if the lender you’re working with only understands gas-fueled cars, it may argue that your vehicle is only worth $40,000 and then lower the amount they’ll finance. It’s usually best to work with a lender who specializes in your industry because of this. For example, if you’re in the transportation industry and want to purchase new trailers, you want to work with a transportation lender who can accurately value your trailers. If you’re in manufacturing, you want to work with someone who understands what’s involved in retooling your machines.

What is the Interest Rate on Heavy Equipment Loans?

Anywhere from about five to 30 percent interest is common with equipment loans. Loan fees, such as origination, underwriting, and packaging, will also be applied to the balance.

How Fast Can You Get Approved and Paid with Heavy Equipment Financing?

While it’s technically possible to be approved and funded within a matter of days, many loans and lenders have processes that can drag out for weeks or months.

What Do You Need to Apply?

In addition to meeting the minimum qualifications as outlined above and being comfortable with the repayment terms, you should be prepared to provide prospective lenders with common business documents, including:
- An invoice for the equipment.
- Up to three months of your bank statements to demonstrate adequate cash flow.
- One to three years of tax statements to prove your revenue.
- Financial documents like profit and loss statements to show you can repay the loan.
- Additional documents such as business licenses.
Alternatives to Heavy Equipment Financing

If traditional heavy equipment financing doesn’t work for you, one of the alternatives below likely will.

SBA CDC/504 Loan

The Small Business Administration (SBA) offers 504 loans through certified development companies (CDCs) or community-based partners that are regulated and certified by the SBA. Qualified businesses can receive up to $5 million. In these cases, the CDC finances up to 40 percent of the loan, and the SBA backs a portion of this. Ten percent comes from the borrower, and the remaining 50 percent comes from a third-party lender like a bank.

Businesses must have a net worth of less than $15 million and an average net income of less than $5 million over the past two years. Ten and 20-year repayment terms are available. Interest is generally lower than bank rates, though it usually takes five to eight weeks to get funded. It’s also harder to get an SBA loan than it is to get a general equipment loan, as companies are usually required to be in business for at least two years, and the minimum credit score is 680.

Term Loans

An equipment loan is a type of term loan, though the broad term encompasses unsecured loans and loans that use other assets as collateral. Rates vary depending on the lender and what you bring to the table but typically range from six to 25 percent plus interest and fees. Some offer variable interest rates too.

An equipment loan may be easier to qualify for than a general term loan, though the term loan may be more ideal if you intend to use some of the funds on things other than your equipment.

Business Line of Credit

A small business line of credit can occasionally work for equipment too. Unlike most of the options here, there isn’t necessarily a definitive end date for payments. Instead, it works like a credit card. If you draw from the account and then pay the money back, the funds become available to draw from again. Lines of credit usually cap out at around $100,000. The APR may be fixed or variable and can range from seven to more than 35 percent.

Qualifying for a business line of credit is similar to qualifying for a term loan, though lenders often look for additional signs of financial security and/or collateral.

Invoice Factoring

Invoice factoring is a completely different way to address heavy equipment financing. Instead of borrowing the money needed for your business equipment, you’ll sell your unpaid B2B invoices to a third party known as a factor or factoring company. The factor provides you with upfront payment for most of the invoice’s value, then collects payment from your customer. When your customer pays, the factor remits any remaining funds owed to your business, minus a nominal factoring fee.

There’s no debt to pay back because the customer takes care of the balance when they pay their invoice. Therefore, your credit is less of a concern with factoring, too, as the customer is the one who ultimately pays the balance.

The amount available will vary for this reason as well. Your factor will run a credit check and determine how much the customer can reasonably pay. For example, let’s say you serve large oil companies that are fiscally strong but take months to pay their invoices. You may be able to factor a single invoice that covers your full equipment purchase. On the other hand, maybe you own and operate a trucking company. Your clients are smaller, and each freight bill is only worth a few thousand dollars. You may want to factor several invoices to fund your equipment purchase. A good freight factoring or oil and gas services factoring company will work with you to find the right funding for your needs.

Get a Heavy Equipment Funding Quote from Charter Capital

As a leading factoring company with decades of experience, Charter Capital helps businesses in transportation, oil and gas services, manufacturing, and more address their equipment funding needs every day. Our competitive rates, flexible and fast funding, and personalized service make managing heavy equipment purchases easy. To learn more or get started, request a complimentary rate quote.
August 2, 2022
3 Benefits of Combining Invoice Factoring and PO Financing
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Very few things excite business owners more than receiving large purchase orders. Unfortunately, the joy is often short-lived as reality sets in. How can you accept a large order when your bank account doesn’t have enough to cover supply costs?

Purchase order (PO) financing and factoring are two common ways businesses unlock working capital in these situations. We’ll explore how each works independently and how the pair can be used together to help growing companies get ahead.

Purchase Order Financing vs. Factoring: What is the Difference?

Purchase order financing and factoring are trade finance options, a special type of financing option used to facilitate domestic and international trade. That means four entities will be involved: the seller of goods or services, their supplier, a final buyer or customer, and a third-party financing company.

Unlike other lending options, these solutions don’t necessarily rely on banks or load you down with long-term debt, so they can be a good resource when you want to grow by fulfilling a larger order but can’t due to the expenses involved.

Purchase Order Financing

Also known as purchase order funding, PO funding, or PO financing, purchase order financing is all about getting the cash necessary for supply purchases. It’s like selling POs, the documents given by buyers to sellers authorizing the purchase of products or services.

There are five main steps involved in purchase order financing.
1. You receive a purchase order from your customer.
2. You request an estimate from your supplier and submit it with your application to a PO financing company.
3. Your PO financing company pays the supplier or provides them with a letter of credit.
4. Your customer receives their order and their invoice.
5. Your customer pays the financing company. The financing company collects their portion and then sends you the remaining money owed.
Purchase order financing companies will each have their own way of doing business. In some cases, your suppliers will receive cash. Other times, letters of credit may be used. This simply means that the financing company will guarantee payment to the supplier.

Sometimes, a financing company will also circumvent you in the loop, which is somewhat common in manufacturing. In these cases, funders provide cash to suppliers, and the suppliers send the finished product straight to your customer. You’ll still receive a payment in the end, though.

It’s also worth noting that sometimes finance companies will cover the total cost of your purchase order, and other times they’ll only pay a portion, so you should be prepared to cover at least some of the cost of supplies. PO financing rates vary quite a bit depending on the amount of the PO, terms, and other considerations, but typically fall between two and six percent of the value of the PO each month the balance is outstanding.

Benefits of Purchase Order Financing

Often referred to as purchase order factoring, or simply PO financing, this form of financing stands out as a strategic tool for businesses. One of the primary benefits of PO financing is its ability to provide swift capital, especially when compared to traditional financing. Businesses that use purchase order financing can access funds even before an order is approved, ensuring they can fulfill an order without unnecessary delays.

PO financing works by allowing companies to use their purchase orders as collateral. This flexibility means that even if a business isn’t approved for PO financing initially, they might still have options like invoice factoring to help bridge their financial gaps. The synergy between purchase order financing and invoice factoring offers a comprehensive solution for businesses facing cash flow challenges.

Moreover, PO financing can provide businesses with the necessary funds to seize growth opportunities, especially when traditional forms of financing might not be accessible. It’s also worth noting that PO financing is typically easier to secure, making it an attractive choice for many enterprises. When PO financing is used in tandem with other financial tools, like invoice factoring, businesses can overcome various financial hurdles.

Which Criteria Matter Most for Purchase Order Finance Approval?

When applying for purchase order financing, approval decisions are not solely based on your company’s credit history. Instead, lenders primarily evaluate whether the customer order and supplier arrangement present a low-risk, high-credibility transaction. A viable funding solution begins with establishing a financially reliable buyer relationship. Customers with demonstrated histories of timely invoice payments and consistent ordering patterns significantly increase the likelihood of transaction approval by financing companies.

Supplier capability represents another critical evaluation criterion. Suppliers must demonstrate the ability to deliver goods accurately and according to established schedules. Purchase order financing frequently involves lenders making direct payments to suppliers for material procurement, making delivery delays or fulfillment issues potential threats to repayment security. Documentation serves as a fundamental component in this evaluation process. Financing providers conduct thorough reviews of purchase orders, supplier quotations, and total invoice amounts to establish appropriate funding terms and financing line structures.

Profit margin requirements significantly influence eligibility determinations. Most financing providers establish minimum margin thresholds—typically approximately 15 percent—to offset financing costs and provide protection against potential repayment shortfalls. When profit margins fall below these established thresholds, financing companies may impose limitations on total financing amounts or decline applications entirely.

Unlike traditional lending products, purchase order financing focuses specifically on individual transaction viability. Businesses receiving substantial volumes of purchase orders or operating under extended payment terms frequently utilize purchase order financing or factoring services to fulfill customer orders without assuming long-term debt obligations. In certain arrangements, financing companies deduct their fees directly from invoice payments, particularly when services are combined with third-party factoring solutions.

Invoice Factoring

Also known as accounts receivable factoring or accounts receivables financing, invoice factoring is all about accelerating payment after goods are delivered. Think of it as selling your outstanding invoices to a third party at a slight discount.

There are four main steps involved in invoice factoring.
1. You receive a purchase order from a customer, deliver goods, and send an invoice.
2. You provide your factoring company with a copy of the unpaid invoice.
3. The factoring company gives you upfront cash, sometimes even on the same day. You’ll typically receive somewhere between 60 and 80 percent of the value of the invoice to start, though some companies will advance as much as 100 percent under certain circumstances.
4. Your customer pays the factoring company. The factoring company then sends you any remaining cash due, minus a nominal factoring fee.
There are both recourse and non-recourse factors, meaning sometimes you’ll be responsible for paying back the factoring company if your customer doesn’t pay, and other times the factoring company accepts responsibility for non-paying clients. In any case, non-payment is rare because factors typically perform credit checks on your customers before accepting invoices and will let you know how creditworthy each client is.

Factoring fees will vary based on several considerations, such as the number of transactions you do with your factoring company, the value of the invoice, and invoicing terms, but will usually land somewhere between one and five percent of an invoice’s value.

Benefits of Invoice Factoring

Invoice factoring offers several advantages to businesses. By selling unpaid invoices to a factoring company, businesses can quickly receive payments, improving their cash flow. This method is beneficial for businesses of all sizes facing cash flow challenges or seeking funds for expansion. Notably, invoice factoring is available even to those with imperfect credit histories. Unlike traditional bank loans, it doesn’t require collateral or personal guarantees, making it a preferable option. It provides immediate cash without adding debt, and the factoring company handles invoice collection, saving businesses time and effort. Overall, invoice factoring is a strategic choice for maintaining steady cash flow and improving working capital.

Factoring Qualification Requirements

Qualifying for PO financing and factoring is more about the strength of your customers and suppliers than your personal or business credit. That’s because the inventory or invoices are considered assets, which serve as collateral for you, and any debt involved is expected to be paid by your customer.

With that in mind, your supplier and customer should:
- Be creditworthy.
- Be a viable business customer or government entity.
- Have a profit margin of at least 15 percent.
One of the benefits of invoice factoring, especially for small businesses or business owners with bad credit, is that neither your personal credit score nor that of your customers is taken into consideration when a factor in determining whether you qualify. Because the invoice factoring company provides you with an upfront cash flow and collects on the unpaid invoices, they are more concerned with your clients’ credit histories than yours.

Companies That Use Purchase Order Financing and Invoice Factoring
- Distributors
- Wholesalers
- Resellers
- Importers and Exporters of Finished Goods
- Outsourced Manufacturers/ Manufacturing Facilities
Sometimes, even non-traditional businesses find ways to fuse these solutions effectively, adapting them to meet unique operational needs. For instance, a staffing agency might leverage staffing factoring to maintain steady cash flow by converting unpaid invoices into immediate funds to cover payroll expenses. At the same time, the agency could explore purchase order financing to manage costs associated with a large, time-sensitive staffing project, such as upfront training or onboarding expenses for a sizable temporary workforce. By combining both solutions, the company can ensure financial stability while scaling its operations to meet client demands.

Qualification Requirements

Qualifying for PO financing and factoring is more about the strength of your customers and suppliers than your personal or business credit. That’s because the inventory or invoices are considered assets, which serve as collateral for you, and any debt involved is expected to be paid by your customer.

With that in mind, your supplier and customer should:
- Be creditworthy.
- Be a viable business customer or government entity.
- Have a profit margin of at least 15 percent.
One of the benefits of invoice factoring, especially for small businesses or business owners with bad credit, is that neither your personal credit score nor that of your customers is taken into consideration when a factor in determining whether you qualify. Because the invoice factoring company provides you with an upfront cash flow and collects on the unpaid invoices, they are more concerned with your client’s credit histories than yours.

Combining Factoring with PO Financing

PO financing and factoring can each help your business thrive in its own right, but pairing them together has unique benefits.

There are seven main steps involved when you pair PO financing with factoring.
1. Your customer sends you a purchase order.
2. You connect with your supplier and get an estimate for the cost of goods to fulfill the order, then give the estimate to your PO financing company.
3. The PO financing company pays the supplier, and the supplier sends you raw goods.
4. You fulfill your customer’s order and send them an invoice.
5. You provide your factoring company with a copy of the invoice.
6. The factoring company pays your PO financing company and may send you upfront cash, too.
7. When your customer pays the invoice factoring company, the factor pays you any remaining cash, minus a small factoring fee.
By going this route, your company accelerates cash flow and can pay less in interest fees to PO financing companies, too.

How Can Factoring and PO Financing Help Your Business Grow?

Now that you know the basics of factoring and PO financing and the process of using them together, let’s take a look at some of the key benefits of this strategy.

1. You Can Take on Larger Orders

If you can’t afford to take on an order or want to be able to accept larger orders than you can now, factoring and PO financing are paths that can help you level up.

2. Funding is Easier to Get Than a Traditional Bank Loan

Traditional bank loans have all kinds of criteria that businesses need to meet to qualify for financing. Because of this, most small businesses don’t get the level of funding they need through traditional business loans. PO financing and factoring don’t work the same way. Again, it’s more about having strong customers and suppliers, and most businesses will usually qualify if they have them.

3. Deployment is Fast

It can take weeks or months to close on a traditional bank loan. If you’re relying on one to fulfill an order, there’s a good chance your customer won’t be willing to wait, and you’ll lose out on the business. Because trade credit is specialized funding designed specifically for these types of situations, funding is incredibly fast and sometimes happens on the day you submit documentation to your PO funding or factoring company.

Solving Cash Flow Gaps: When to Use PO Financing vs. Invoice Factoring

Businesses often encounter cash flow gaps at two key stages—before fulfilling an order and after delivering the product or service. Purchase order (PO) financing and invoice factoring address these gaps differently based on when the cash is needed.

Before Fulfillment: Use PO Financing

When a business receives a large purchase order but lacks the funds to buy materials or pay suppliers, PO financing bridges that upfront gap. It’s especially useful for:
- Manufacturers and wholesalers with growing order volumes
- Companies working with overseas suppliers that require upfront payment
- Businesses facing long lead times between order and delivery
With PO financing, the funding company pays suppliers directly so production can begin without draining internal cash reserves.

After Invoicing: Use Invoice Factoring

Once the order is fulfilled and the invoice is sent, the next gap begins—waiting 30, 60, or even 90 days for payment. This is where invoice factoring comes in. It allows businesses to:
- Convert receivables into immediate working capital
- Fund payroll, inventory restocks, or operating expenses
- Maintain steady cash flow without taking on new debt
By using both services at different points in the sales cycle, businesses can maintain momentum from order to payment without disruption.

Take Your Business to the Next Level with PO Financing and Factoring

If you’re ready to scale your business with factoring, Charter Capital can help. It doesn’t cost a thing to become established and find out your rate, so you can get set up now and be ready to take action the next time a large order heads your way. Request a complimentary rate quote now.
December 23, 2021
Big Companies Are Slowing Supplier Payments

Big Companies Are Slowing Supplier Payments

As the credit crunch continues to intensify, large companies are employing strategies to shore up their cash flow constraints by delaying payments to their suppliers.

In a recent article from the Wall Street Journal, “Big Firms Are Quick To Collect, Slow To Pay”, corporations are attempting to beef-up their collections all while slowing down their accounts payable to 60 days or more. As revenues for large corporations continue to slow in an already weak economy, they are putting the cash flow burden on their suppliers.

Since many of the suppliers of larger companies are small to mid-market businesses, they may carry an additional burden due to the ever dwindling availability of bank loans or lines of credit. Also, small to mid-sized businesses have little bargaining power when dealing with their larger customers and are forced to accept more lengthy terms. This can have a devastating impact on suppliers that are already strapped for cash.

As business owners are already struggling with cash flow in today’s economic environment, financial relief seems to be scarce. However, Accounts Receivable Financing is an often overlooked choice for businesses to manage their cash flow. This form of financing (also known as Factoring), is a financial tool that allows businesses to capitalize on the power of their outstanding invoices. Factoring is a valuable mechanism to turn a business’ invoices into immediate cash, enabling them to fund business operations.

It is not widely understood, but a factoring firm provides funds to its clients based upon its clients’ accounts receivable. Most invoices billed to credit worthy customers can qualify. Banks, on the other hand, must consider more stringent criteria before qualifying a borrower for any type of funding. In most cases, when considering assisting a business based strictly upon its accounts receivable, factoring companies can provide funds when a commercial bank cannot.

September 9, 2020
Still Looking For Financing?

Many Small and mid-sized companies that are looking to grow are still running into difficulties when looking for financing: Loans are still hard to come by and can be more costly than before the recession. Commercial lending is still weak and small business lending remains flat. This indicates that securing a lending source is as difficult as it has ever been.

One study suggests that less than a third of small businesses that desire credit would qualify for traditional or SBA-backed loans. In the wake of a devastating financial downturn, banks have continued to tighten their lending practices in order to lower risk levels and comply with tougher regulations. This leaves millions of small and mid-sized businesses without a source of financing to grow or add new employees.

As the economy continues to struggle toward recovery, it is increasingly important for small and mid-sized businesses bolster their finances. Since it is well known that small and mid-sized businesses power the economy, it is possible that an increase in lending to this market segment could help further improve economic conditions and job growth.

Even if we are in the beginning of a period of economic growth, the fact remains that any rebound from the recession may be muted and difficult to see in real terms. Even though economists see recovery, it is still not strong enough to have any real impact on small businesses today.

Companies that are still looking for some form traditional bank financing are better off looking for private asset-based funding. During times like these, asset-based financing (such as invoice factoring) has come to the aid of the small business sector many times by providing the badly needed financing that traditional lenders are currently unable to consider.

Dealing with an uncertain economy is never easy, especially for small businesses. Unlike their larger counterparts, small businesses rarely have the resources to monitor and take corrective action for every trend and issue. And even those owners who have weathered numerous business cycles may be faced with new circumstances that confound their otherwise successful instincts and knowledge. But a predictable source of financing can certainly ease this pressure.

September 9, 2018
Blockchain. Bitcoin. Big Deal… or Just Big Hype for Small Business?

Blockchain itself has many types of uses beyond cryptocurrency.

“Two bitcoins, four bitcoins, six bitcoins, a dollar… all for blockchain, stand up and holler!”

It’s unlikely varsity cheerleaders are going to do that routine along sidelines anytime soon. However, there are a lot of people rooting for the increasingly popular blockchain and bitcoin, and headlines about these technological phenomenon now fill the news.

If you don’t know what either of these does, you’re rapidly becoming a minority. Both are sweeping the business world. First because each offers a revolutionary new way to conduct commerce, and second because they have become the “next big thing,” much like the dot.com bubble of nearly 20 years ago. Are blockchain and bitcoin appropriate for small business? And will this bubble, like all other bubbles before it, burst?

Let’s start with a few simplistic explanations. Blockchain began as technology that allowed digital information to be shared, but not copied. As far as the business world goes, blockchain serves as a ledger or spreadsheet of sorts, to record value. Unlike a paper ledger or an Excel spreadsheet, Blockchain resides on the Internet. As such, it can be used to verify and record endless transactions – initially monetary transactions, but eventually any type of transaction involving something of value. A key selling point is that by utilizing Blockchain, users never have to go through a bank, credit card, etc.

Blockchain is digital, however it is not housed in any single server or database. Rather it utilizes peer-to-peer network sharing (remember Napster, an early example of peer-to-peer?). This means, essentially, that blockchain is everywhere. It is truly public and transparent, and its files are continuously updated and reconciled. As for security, proponents say that its decentralized nature protects it from hacking and interference (blockchain also employs encryption). It is not controlled by a single entity that can be corrupted and it has no fixed location that can be compromised or fail.

Bitcoin is an outgrowth of blockchain. More accurately, bitcoin is, itself a blockchain. Bitcoin is what is more accurately known as a cryptocurrency – a digital currency in which encryption techniques are used to regulate and verify the transfer of funds, operating independently of a central bank. According to one source, bitcoin has been in existence since 2008. However, only in recent years has it grabbed the attention of the business world, and in particular, investors.

Trading in bitcoin has seen a rollercoaster of activity, with dazzling highs and terrifying falls. It is definitely not an investment for the faint hearted. At the moment, many respected observers claim the bitcoin market not only has all the trappings of a classic speculation bubble, but that the bubble may have already burst.

This article is not about bitcoin investing. However, with the incredible volatility surrounding bitcoin trading, many concerned national governments are considering cracking down on both Bitcoin and other cryptocurrencies. This could put its future in doubt. One of the touted benefits of bitcoin is that it is not regulated or controlled by any entity. If that were to change, who knows what could happen?

This article is more concerned with whether utilizing blockchain and bitcoin are a good idea for a small business. On those subjects, the results are mixed. Bitcoin is a cryptocurrency that is an outgrowth of blockchain. In other words, bitcoin is just one feature of Blockchain. Blockchain itself has many types of uses beyond cryptocurrency.

Blockchain, for example, can be employed to bring products and services to market cheaply and quickly. It can also help reduce data storage and security costs, easing the economies of scale problems that often hinder small businesses. Best of all, in terms of our discussion, it can help enforce contracts, particularly so-called smart contracts or cryptocontracts. These are computer programs stored on blockchain technology that directly control the transfer of digital currencies or assets between parties under certain conditions. Smart contracts can be of help in paying employees, paying bills, filling orders or invoicing.

Smart contracts can offer small businesses several advantages over regular legal contracts drawn up by a lawyer. For one, they are quicker and cheaper to execute as they cut out intermediaries and third parties. As they are stored electronically, there is backup, meaning the other party can’t claim to have lost it. Finally, they are encrypted to provide safety. Here is an example of how to set up a smart contract.

Of course, bear in mind that few, if any, systems are perfect. Such is the case with a blockchain smart contract. Obviously, with any type of computerized, electronic technology, bugs can impair programming. Human error can also occur during coding. Lastly, at the moment, there are almost no government regulations regarding smart contracts.

So, are blockchain and bitcoins an effective solution for your small business? That’s ultimately a question only you can answer. As with any business decision, it requires proper due diligence and careful consideration. There is a lot of hype and cheerleading going on about blockchain and how it’s the next “big thing” in business. Sometimes it can be deafening. We’ve presented some advantages and disadvantages to blockchain, bitcoins and smart contracts to get you started on making an informed decision.

March 2, 2018
Top 10 Reasons For Invoice Factoring
If you are looking for fast cash flow solutions for your business, factoring your accounts receivables (invoices) can provide you with the funding you need to succeed almost immediately. Invoice Factoring is a financial transaction and type of debtor finance in which a business sells its invoices to a third party (factoring company) at a discount. The factoring company will then collect on the unpaid invoices for you, and once all of your clients have paid, the factor will reimburse you the remaining balance (minus a small fee).

Many small companies enjoy the benefits of accounts receivable factoring, so we have compiled a list of the most important reasons to factor invoices.
1. It can turn your accounts receivable into immediate cash without giving up equity in your business.
2. The process is much faster than a conventional loan and is simpler.
3. Because your business receives funds up front, it enables you to offer better and more competitive credit terms to your customers.
4. By using the cash you receive from factoring your invoices, it enables your business to take advantage of early payment or volume discounts from your vendors.
5. It lets you concentrate on growing your own business instead of the Accounts Receivable and Collection process.
6. It helps you to begin to build and improve your credit because your business is able to pay its creditors within terms. You no longer need to wait on customer payments so that you can pay your bills. Partnering with the best factoring companies ensures you not only get fast cash flow but also the support needed to manage your business effectively and improve credit.
7. No new debt – Invoice Factoring is not a loan.
8. It helps to get invoices paid faster – Having a professional and experienced company assist you in managing your Accounts Receivable and collections usually shortens the days that invoices remain unpaid.
9. Monitoring and early detection of customer service issues – The factoring company can essentially be your outsourced A/R department and can alert you to any potential problems with your customers.
10. Receive invoice processing assistance, credit screening & monitoring, as well as professional collections.
If your cash flow is suffering and you are looking for a financing solution that will save you time and money while bringing about all of the above benefits, invoice factoring is for you.

Invoice Factoring for Business Growth: A Top Financial Strategy

Invoice factoring stands out as a top choice for business growth, offering a range of benefits that go beyond mere cash flow improvement. Invoice factoring empowers business owners to unlock the value of outstanding invoices, transforming them into a viable funding source that doesn’t require taking on new debt. Factoring for service providers, such as businesses in consulting, healthcare, and IT services, allows for a steady cash flow to manage business cash flow more effectively but also positions companies to grow their business by leveraging flexible funding solutions. For industries like staffing, where managing payroll is critical, staffing invoice factoring provides a reliable solution to ensure consistent cash flow and meet financial obligations without delays. Moreover, there are many advantages of invoice factoring, such as improved creditworthiness and access to working capital, that allow businesses to take advantage of early payment discounts and invest in business growth opportunities. This strategic move not only updates your choices for financing needs but also aids in maintaining a healthy cash flow, which is essential for new business ventures and established entities looking to scale. By choosing to factor your invoices, your company can navigate the complexities of traditional financing hurdles, update your financial strategy, and confidently secure a profitable future. To take the next step, request a free rate quote for your business.
April 3, 2013