By a number of calls we receive, there is much confusion about the difference between Invoice Factoring and Purchase Order Funding (PO Funding). Let’s walk through the steps of how each work and what types of companies they are each applicable too.
What is the Difference between Invoice Factoring and Purchase Order Funding?
Invoice Factoring is available to any company that bills creditworthy clients and must give terms or waits to receive payment. 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 Factoring is that you must deliver the product or service. 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.
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. However, 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 might work for you. You will also hear terms like Inventory Financing, Supplier Financing, Letters of Credit and Vendor Guarantees. All that to describe the funding of your products to buy for resale versus advancing you monies against products you have already delivered.
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. It would be best if you showed your supplier the FOB cost, freight cost, packaging cost, markup and selling price. In your spreadsheet show both the gross dollars and by percentages. If your gross margin is too small, there will be a limit in your funding choices. What is too small? Typically less than 15%. However, that depends on the size of the transaction days the money is out and the creditworthiness of your client.
Remember, if you generate an invoice and don’t want to wait to receive payment, Invoice Factoring is an option. However, 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.
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