For many business owners, cash flow can be a routine problem. It is no secret that businesses need cash in order to pay employees, buy supplies, and pay for shipping orders. So, where can a company get the funds it needs? Some have tried to turn to what is known as purchase order funding instead of using invoice factoring. This is not always the best solution. Here is why.
To begin, we must first understand that these are not the same.
What is Invoice Factoring?
Invoice factoring can be used by virtually any company that normally bills its creditworthy customers and clients. However, it also involves various types of terms or the business must wait in order to be paid. This is common for some businesses such as transportation, consulting, food service, HR staffing, and many others. Normally, the client will get terms of Net 10 or Net 120 days.
With invoice factoring, you can borrow the amount that is owed to you from these customers. Keep in mind that you must have actually delivered the goods or service in order to create an authentic Accounts Receivable.
What is Purchase Order Factoring?
In simple terms, if your company creates an invoice and ships the goods, but you won’t need to get money faster than the terms allow, consider using Invoice Factoring as a very viable option. If your company does not have the funds to purchase the materials needed to fill an order, you may wish to consider using Purchase Order Financing. This will allow you to accept the job which, without those funds, your company would have to pass.
It is also important to keep in mind that PO Financing has some drawbacks. These include the following:
- This can be difficult to secure,
- Normally requires a good management history
- PO financing is not a loan
- It is often reserved only for large orders that meet a certain monetary level. For these reasons, those who need to use PO financing are always best served if they shop around for the best deals. As well as shop for those companies that will actually work with them on the PO funding needs.
Those companies that ship goods and have access to accounts receivable will almost always find it in their best interest to explore invoice factoring when they need to generate faster payments. Even so, shop around as those companies that offer invoice factoring will offer different rates and offer different levels of maximum payments. The better companies can offer (certain businesses) as much as 90 percent of the value of the account receivable.
The good news for most working companies is that there are sources of funds out there if one knows where to look and what to look for his or her type of business.
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