If you’re interested in realizing sales growth for your business, maintaining a steady, predictable source of cash is vital. Even for your goods and services sold in the ordinary course, there’s still a chance that your invoices won’t be paid immediately, leaving you with gaps in your cash flow. In order to avoid cash flow gaps like this, however, there are third-party services available to fund growing businesses whose sales are dependent upon offering payment terms within the range of 10 to 90 days.
These services are designed to help businesses pay their obligations incurred in connection with the sale and delivery of products or services. Among these services are purchase order financing and invoice factoring, both of which provide funds for the purpose of fulfilling orders. However, there are a few distinct differences between purchase order financing and invoice factoring worth knowing.
Purchase Order Finance and Invoice Factoring Are Two Different Things
Purchase Order (PO) Financing:
In business, purchase order financing (PO Financing) is a short-term financing method that businesses use to cover the cost of manufacturing or purchasing goods that have been pre-sold to customers.
This service can only be used by businesses that manufacture or distribute tangible products like clothing, furniture, books, etc. Third-party companies that provide purchase order financing cover the up-front costs that the business would pay, such as to a supplier, for the purpose of fulfilling a customer order. The financing company deducts its fee and transfers funds to your company. After the finance company receives payment from your customer, it deducts its fee from the payment and sends the remaining balance to you.
PO financing is usually used in a situation where a customer has ordered the goods, but the business does not have enough capital to pay its supplier upfront. So, the borrowing company will approach a PO financing company, which will evaluate the purchase order and pay the supplier after a successful application process.
After receiving delivery of the products and fulfilling the order, the borrowing company would then invoice their customers as usual. Once your customer receives the goods, you invoice them for the fulfilled order, and they pay the purchase order financing company directly. The customers then send their payments directly to the PO financing company, at which point the PO Financing company will deduct its fees and reimburse the remaining balance to the borrowing company. The finance fee and the terms for applying vary according to the third-party company’s specifications.
Invoice factoring can be used by businesses that provide both services and tangible goods. After the customer has received the goods or services, businesses send out an invoice detailing the goods and services purchased, as well as the terms of payment. This creates an account receivable. In invoice factoring, businesses sell their accounts receivable to a company that provides factoring services at a discounted price. In today’s business world, the opportunity to make sales is usually dependent upon being able to offer your customers generous payment terms. While this is an effective way of generating business revenue, customers will take time to make the payment due on the invoice, leaving the business short of operating cash.
A third-party invoice factoring company acquires unpaid invoices from the business by paying the business upfront in exchange for receiving the payment that is eventually made by the customer account. This allows the business to manage operating costs before payments are actually received from customers for open invoices. The cost of factoring your invoices is a fee earned by the factoring company that is typically equivalent to a discount that you might offer a customer for prompt payment.
Both options can be important considerations for a growing business, especially as the costs of operation increase. Another pro for both invoice factoring and purchase order financing is that they are both viable alternatives to traditional loans, especially for start-ups and small businesses. This is because both factoring companies and PO financing companies are more concerned with the creditworthiness of your customers (those responsible for paying the invoices) than the business’s credit history.
If you are a distributor of goods, PO Financing can likely be a valuable solution, especially for online retailers who may receive payment before the product is shipped. Invoice factoring is recommended for companies whose operations rely on invoice payments from customers, which can be a delayed process. Both are valuable solutions to business needs and can help you maintain your bottom line while you facilitate growth.
To find out more about your options when it comes to invoice factoring, contact Charter Capital today!
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