Invoice Factoring and Purchase Order Financing – What’s the Difference?

A steady cash flow is vital for a business looking to expand and grow. Even if your business is doing well and making sales, there’s still a chance that your invoices won’t be paid in a reasonable time, leaving gaps in your cash flow. To avoid these gaps, there are third-party services that fund growing businesses whose sales are dependent upon offering payment terms. Among these services are purchase order financing and invoice factoring. Both of these services provide funds for the purpose of fulfilling orders. However, there are a few distinct differences between the two.

Purchase Order Financing

This service is for businesses that make or distribute tangible products like clothing, furniture, etc. Companies that provide purchase order financing will cover the initial costs that the business would pay for the purpose of fulfilling a customer order. After the business has the cash to make the payment, they pay back the third-party company, including some financing fees. These financing fees vary from company to company.

Invoice Factoring

Invoice factoring is used by businesses that provide tangible goods as well as services. After the customer receives their product or service, they also receive an invoice included the prices of what they’ve received along with payment terms. This creates an account receivable. Giving customers generous payment terms is one option to generate more sales. For example, more people will be inclined to purchase from your business if they don’t have to pay until 90 days from the date they receive their product. While this is a great option to reach out to more clients, they will most likely take the whole 90 days (or other agreed upon terms) to make their payment, leaving your business short of operating cash.

A third-party factoring company will acquire the accounts receivable from the business by paying them up front in exchange for receiving the payment from the customer the invoice was originally given to. This allows the business to have a steady cash flow to manage operating costs before their customers actually pay them. The cost of factoring your invoices is a fee determined by the specific factoring company you work with.

 

Both of these financing options can be great tools for a growing business, especially as the cost of operation increases along with the size of the business. If you are a distributor of goods, purchase order financing can most likely be a solution for you. Invoice factoring is recommended for companies whose operations rely on invoice payments from their customers. If you’re interesting in learning more about how factoring can work for you, call us at 800-405-5464. 

  • September 28, 2017
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