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By the number of calls we receive at, there is much confusion about Non-Recourse Invoice Factoring versus Purchase Order Funding. In this article, we will walk you through the steps of how each one them works. We will also tackle which type of companies each financing option applies.

Invoice Factoring vs PO Factoring

Should you go for Invoice Factoring or PO Factoring?

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 should provide terms or waits to receive the payment. 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, then we can advance you up to 92% against your invoice. You will receive the remaining balance once your customer has paid minus a low-cost fee. The key to consider 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 challenging situation and has cash flow difficulties, yet, hold creditworthy invoices, then funding is available through accounts receivable financing. You can sell your creditworthy receivable to a factoring company that will provide you with cash against your accounts receivables. Once validated, you will receive an upfront payment of up to 92% of your good invoices’ value. You will receive the remaining balance once your customer has paid minus low-cost fees. This way, Invoice factoring enables your business to have enough working capital to aid 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 in the same way as bank interests.
Typically, the fees can range from 1.5% to 3% over base rate. The calculation of the factoring fees are daily 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 bad debts. The amount should principally 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 Goods or Services 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. However, 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 service, then 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. PO Financing is a short-term commercial funding solution. This will accommodate your business’ financial needs by providing your suppliers with an advance payment for verified purchase orders, which funds your business manufacturing costs. 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. Besides, PO Funding provides your business with the needed cash, to support your orders’ delivery as well as grow your business. This will also enable you to 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 your monies against products you have already delivered. Thus, PO funding ensures you can make sales that exceed your current financial capabilities.

How Can My Company Qualify for 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 to fulfill the job for your customers. After the completion and payment of orders, 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 you 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, then there is a limit as to your funding choices. 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 a creditworthy invoice, but you don’t want to wait to be paid, then Invoice Factoring is your solution. If you don’t have the money to buy the goods from your supplier to fulfill an order, then PO Funding 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. 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.

Ready to get funding for your small business? Call (888) 400-5930 or use the fast, safe & secure online funding application.

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