Purchase Order Financing vs. Invoice Factoring | SMB Compass
Ezra Cabrera | August 4, 2021
Key Takeaways
- Invoice factoring allows business owners to sell pending invoices to a factoring company at a discounted price. The factoring company usually gives 80% to 90% of the total invoice value upfront.
- PO financing has a lot in common with invoice financing, which explains why people confuse them with one another. Rather than selling pending invoices, PO financing lets you sell purchase orders – a commercial document given by buyers to sellers listing, and authorizing the products/services they’re looking to buy.
- Both purchase order (PO) financing and invoice factoring can be used to obtain cash in times of a cash crunch. Businesses struggling with cash flow can use the cash to cover the ga
Small business owners are no strangers to cash flow issues. You dream of growing and expanding your company, but unfortunately, the lack of working capital holds you back. For many companies relying on invoices, waiting for months before collecting the revenue that is owed to you, is a common occurrence. This could mean you won’t have enough cash on hand to begin the next project. When this happens, you might want to consider purchase order financing, or invoice factoring.
Both purchase order (PO) financing and invoice factoring can be used to obtain cash in times of a cash crunch. Businesses struggling with cash flow can use the cash to cover the gaps and improve their financial health. While these financing options have a lot in common, they differ in a number of ways. Here’s how:
Purchase Order Financing vs. Invoice Factoring
At a glance, PO financing and invoice factoring may seem similar because they’re both financing options for businesses with invoice payments. However, there’s a difference between the two.
Invoice Factoring
Invoice factoring allows business owners to sell pending invoices to a factoring company at a discounted price. The factoring company usually gives 80% to 90% of the total invoice value upfront. Once your customers pay their invoices in full, the factoring company will give you the remaining balance minus a small transaction fee. Remember that it’s not your credit score that matters, but your customers’. With that, you should make sure that they have a good credit standing. Otherwise, it will be hard to find a factor to purchase your invoices.
Related: Invoice Factoring 101: Everything You Need to Know About Small Business Factoring
PO Financing
PO financing has a lot in common with invoice financing, which explains why people confuse them with one another. Rather than selling pending invoices, PO financing lets you sell purchase orders – a commercial document given by buyers to sellers listing, and authorizing the products/services they’re looking to buy. The process of PO financing works similarly to invoice financing. You sell your purchase orders to a factoring company, who is turn give you the funds you need to purchase supplies.
But in the case of PO financing, you won’t be given the money upfront. Instead, the PO financing company pays the supplier directly. They will also collect the payments themselves and give you the remaining balance of the payments after they’ve deducted your payment and the fee.
TWO Important Factors to Consider Before Making a Decision
There are two important factors you need to consider if you’re thinking about taking out PO financing, factoring, or any other type of business loan:
- The reason(s) why you need a loan; and
- The type of loan your company is qualified for.
Knowing why you need a small business loan narrows down your options. If your company has pending invoices and you’re waiting to get paid for the work you’ve already completed, invoice financing is a great option for you. However, your clients should have a good credit history in order for you to qualify.
PO financing is ideal for businesses that need working capital to purchase supplies and materials for a project. If you qualify, PO financing will give you the funds you need to buy the supplies that are required to complete a job.
Purchase Order Financing vs. Invoice Factoring: Pros and Cons
Although PO financing and Invoice factoring does differ from one another in some way, they offer almost the same benefits to SME’s. Both financing options occasionally work hand in hand and so, their advantages often go together, as well. Here are some of the pros and cons of invoice factoring and PO financing:
PO financing and Invoice Factoring PROS:
- You get cash instantly to fulfill customer’s orders
- Easy and fast access to additional funding.
- Small start-up businesses can qualify.
- You don’t need to have a good credit score.
- It’s cheaper than bank loans.
- You won’t have to deal with payment chasing.
- It won’t affect your credit score.
PO Financing and Invoice Factoring CONS:
- Interest rates can change and add up.
- Your customers will pay the financing company directly.
- Not ideal for businesses with customers who have poor credit scores.
- Higher risk of payment defaults.
- Not ideal as a long-term financial solution.
Purchase Order Financing or Invoice Factoring?
As you search for small business loans, it’s a good idea to work with an inside financial expert who can cut through the red tape and help you find the best loan for your business, quickly. Whether it’s purchase order financing or invoice factoring, you can know more about these options if you talk to a financial expert. They can offer advice and suggest which financing option is best for your business. You can also benefit a lot from consulting since you’ll be able to learn more about business loans and how you can use it to grow your business.
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