By a number of calls we receive at businesscash.com, there is much confusion about Non-Recourse Invoice Factoring versus Purchase Order Funding. Let’s walk through the steps of how each one them works and what types of companies they are each applicable too.
What is Non-Recourse Invoice Factoring?
Non-Recourse Invoice Factoring is a financial agreement between your business and a factoring company for financing based on accounts receivables against cash. It is available to any company that bills creditworthy clients and must give terms or waits to get paid. So if you sell Trucking, Staffing, IT, Consulting, Food, Wine, Paper, Barbeque Sauce, Bullets, etc. and you give your creditworthy client terms of Net 10 to net 120 days, we can advance you up to 90% against your invoice. The key to being considered for Factoring is that you must deliver the product or service to B2B OR B2G. Until your client takes possession of the goods and are happy then a true Accounts Receivable has been created and a factoring company can buy your invoice.
How does Non-Recourse Invoice Factoring work?
Non Recourse Invoice factoring/ AR financing can be a great alternative solution for any business that hasn’t got or has already consumed its credit line. If your business is in a delicate situation and has cash flow difficulties, yet, hold creditworthy invoices, funding is available through accounts receivable financing. In fact, you can sell your creditworthy receivable to a factoring company who will provide you with cash against your accounts receivables. Once approved, you will receive an upfront payment up to 90% of your good invoices’ value and in due time your factoring company collects the debt from your customers and send you back the remaining balance minus service fees. This way, Invoice factoring allows your business to have enough working capital so as to support your operations and growth opportunities.
What are Non-Recourse Invoice Factoring rates?
Accounts receivables financing rates can vary from a factoring company to another and are often negotiable.
Receivables Financing rates:
Factoring charges are applied exactly in the same way as bank interests.
Typically, the fees can range from 1.5% to 3% over base rate. In fact, the factoring fees are calculated on a daily basis and applied monthly.
Credit management fees:
Credit management and administration can also have a fee. The amount should depend on your turnover, invoices’ volume and your customers’ number.
Typically, the fees can range from 0.75% to 2.5% of turnover.
Credit protection charges:
These will be applicable when the factor is liable for any kind of bad debts. The amount should mainly depend on the factor’s assessment of the risk level.
Typically, the fees can range from 0.5% to 2% of turnover.
So this brings up the question, what if you haven’t delivered the good or service and you need money? Well, Let’s talk about service companies first.
An order for guard services, a website, installing cable or IT staffing beats no order, but until you deliver the service an asset has not been created. At least an asset that you can borrow money against or turn into working capital. Now you might be able to get an Angel Investment or an Equity Infusion but that is a whole different kind of money. The type of money where you have to give up an ownership stake. If you are providing a tangible product versus a service, PO funding or Purchase Order Financing might work for you.
What is Purchase Order Funding?
Purchase order financing (POF), also referred to as Supplier Financing, Accounts Payable Financing or Trade Financing is a is a short-term commercial funding solution that will accommodate your business’ financial needs by providing your suppliers with an advance payment for verified purchase orders which funds your business manufacturing costs. In fact, PO financing gives you the ability to have goods available for your clients from your suppliers before an invoice is generated. If you are a product importer, reseller or distributor, and need capital to deliver a large purchase order, then Purchase Order Financing can be the best funding option to provide your business with the needed cash, to support your orders’ delivery as well as grow your business and have the ability to take larger orders. You will also hear terms like Inventory Financing, Supplier Financing, Letters of Credit and Vendor Guarantees to describe the funding of your products to buy for resale versus advancing you monies against products you have already delivered. Thus, PO funding ensures you can make sales that exceed your current financial capabilities.
How to qualify PO Financing?
This method of funding can’t apply to service-based businesses as the lender pays off the supplier for providing needed goods to allow your business client fulfill the job for your customers. Once orders are performed and paid for, the lender deducts its fees before remitting the remaining balance to your business.
How do you go about seeing if you qualify for PO Funding? Well first have your transaction mapped out. Utilizing an excel spreadsheet is the best way and shows the funding source you know what you are doing. You should show cost FOB your supplier, freight cost, packaging cost, mark up and selling price. In your spreadsheet show both the gross dollars and by percentages. If your gross margin is too small, your funding choices will be limited. What is too small? Typically, less than 15%. But that depends on the size of the transaction days the money is out and the creditworthiness of your client.
What funding option to choose for your small business?
So remember if you are a B2B or B2G business and you generate creditworthy invoice but you don’t want to wait to be paid, Invoice Factoring is your solution. If you don’t have the money to buy the goods from your supplier to fulfill an order, PO Funding or Purchase Order Financing might work for you.
However, it is important to understand that the AR financing process is independent of the PO financing on but not vice versa. In fact, PO financing can’t happen without Invoice factoring/ receivables financing. A vendor guarantees, which is an agreement between involved parties (your business, your supplier and the factoring company) is usually required. The concept is simple, the factor engages to directly pay your supplier, out of the factored invoices proceeds. Thus, the factor would only make the payment if your business agrees to factor its invoices.