• Porter Capital Blogger

Are Purchase Order and Invoice Financing Different?

One of the common issues that many small businesses often face is their unstable cash flow. They want to keep expanding business capabilities but have limited access to resources, especially money. For example, if your business does not rely on any finance alternative, you have to wait for it to collect revenues for the work you have completed. Plus, your business might not have enough cash to start new tasks. If you want to generate capital for your business, invoice factoring is no doubt a fantastic way to pay current debts and bills. It is a simple process as compared to traditional financing solutions such as bank loans. In invoice factoring, businesses sell their accounts receivable to a company that provides factoring services at a discounted price. The option is great if the holder of the invoice has good credit. Reliable factoring companies, like Porter Capital, offer instant funding and flexible invoice factoring to their clients.

Many people confuse invoice factoring with purchase order financing as both give a boost to the current capital of small businesses. Both options are types of loans that give startups access to the money and resources they need to excel in the business and invest in new opportunities. But, both invoice factoring and purchase order financing are a different process not only in terms of funding businesses but also in processes. Knowing the difference between the two finance alternatives is important to choose the best option for your business.

Invoice Factoring vs. Purchase Order Financing

As mentioned earlier, the two financing options seem to have similar features on the surface as they both rely on invoicing payments. But this is not the case. There are some crucial differences between invoice factoring and purchase order financing.

What Is Purchase Order Financing?

In simple words, PO financing is a way to get the necessary funds and money to buy supplies and materials to fulfill the customer's order. The high-growth businesses avail this option to deal with big opportunities their cash flow is unable to cover. The finance product makes more sense for the giant operations and businesses to fulfill multiple orders at the same time or any large order by using expensive inventory. Mostly manufacturing businesses and industries require supply to get the orders completed.

PO financing is quite simple. Your lender provides you the cash needed to make purchases from the suppliers. Once the project is finished and you receive the payments, the lender collects his portion of the revenues on the particular task. Here is how POF chain works:

  • Receive order from the client

  • Estimate service or project cost

  • Apply for POF

  • Receive funds from the lender

  • Work on a project and receive goods from suppliers to be delivered to customers

  • Customer is invoiced

  • Customer pays the lender for the services

  • The lender collects its charges and sends money to you

What is Invoice Factoring?

Invoice factoring is a finance tool that B2G or B2B companies use to fill cash-flow gaps. The finance product is relatively a great option for small businesses. The businesses that opt for this option do not need to wait to get paid for the services they provide. They do not need to chase down rendered funds from their late-paying customers. Invoice factoring provides those missing funds to the businesses through factoring.

For example, if you run a trucking company, invoice factoring makes an ideal option for your business. It is because these businesses often struggle due to late payments from the stores they deliver goods to. Most truck owners have to wait for at least 90 days to get paid as per the scheduled. To continue the operations, they need money, and that can come from factoring their invoices.

The working process of invoice factoring is straight forward. All you need is to provide invoices (credible ones) to a reliable factoring company such as Porter Capital. After evaluating your credit scores, the factoring company buys your invoices. The underwriting decision of factoring companies is majorly based on the customer’s ability to pay the debt.

Best Scenarios to Choose Invoice Factoring and PO Financing

Remember that the right kind of business loan depends on two factors.

  1. The kind of business you do

  2. Where do you use your funds

Both these options are linked inherently. Not all businesses require invoice factoring to keep their cash-flow running. In the same line, PO financing is not a suitable option for all kinds of businesses.

Invoice factoring follows completely different scenarios as compared to purchase order financing. To qualify for invoice factoring, it is important that you complete the task to get the invoice ready for your lender and to use the factoring line. Once the task is completed, an invoice is sent to the customer, you are eligible to factor the invoices. Businesses like consulting, manufacturing, and consulting can opt for invoice factoring. Moreover, the credibility of your clients matters a lot when it comes to factoring invoices. If you tend to work with small businesses, then factoring invoices might not be the right loan product for your business. However, if your clients are big companies or government firms, then invoice factoring is the right direction to get funds?

Final Thoughts on Why Invoice Factoring is Better than PO Financing

Analyzing your business needs is of paramount importance to determine which loan product is suitable for your business. There is no denying that both finance alternatives provide good standing for your business and support the major operations.

Your business must have decent credit scores and business licenses to opt for these loan products. Thus, purchase order financing, and invoice factoring benefits businesses in different scenarios but serves to maintain finances - reach out to Porter Capital if you have any questions so that we can help guide you and your company to the best financial decision when it comes to lending.

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Birmingham, AL 35203