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PURCHASE ORDER FINANCING AND INVOICE FACTORING
As a small business owner, it can be difficult to fund your business. And while there are numerous funding options, it can be challenging and overwhelming to determine which one is best for you and your business.
It’s for this very reason that Yardline started. We are here to demystify the small business funding application process and get you the funding you qualify for (from $5k to $20 million) in as fast as twenty-four hours.
Both purchase order (PO) financing and invoice factoring can give you and your business the funding it needs to manage cash flow shortages. But, there are also key differences between the two.
Let’s take a look at those differences in order to determine which option will best suit your needs.
WHAT IS INVOICE FACTORING?
Like PO financing, invoice factoring, also called invoice financing, is used by businesses and business owners to close cash flow gaps by accelerating cash flow. This loan provides instant payment for work already completed or goods already delivered while you await the payment of invoices.
As such, this type of funding is used when a business has already delivered and completed a customer order, but they have not yet received payment from the customer.
While invoice factoring eliminates the customary thirty, sixty, or ninety-day payment waits and the need to chase down funds, businesses can only qualify for invoice factoring if they’ve already issued the invoice to the customer.
Most factoring agreements are not non-recourse financing. So, even if you are approved and receive funds for an invoice, if the customer doesn’t pay, you will need to reimburse the amount of the invoice back to the factoring company.
PROS AND CONS OF INVOICE FACTORING
Increased cash flow - Invoice factoring allows for faster funding speeds and cash flow because waiting is no longer necessary and the cash can be reinvested immediately. The more outstanding invoices a business has, the more cash flow they receive.
Easy approval - It’s easy to get approved as qualification requirements focus on the customer’s creditworthiness, not the business or business owner.
No collateral - Lenders typically do not require business owners to pledge collateral in order to receive invoice financing.
Contract - Some lenders may require businesses to sign a contract to factor for a minimum time frame, which can add to the overall cost of invoice factoring rates.
Customer constraints - Eligible customers are limited to other businesses and government entities and lender fees are determined by your customer’s credibility.
Lack of control - In invoice factoring, the supplier gives control over the payment collection to a third party and they have no control over their process of collecting payments. If the third party treats customers in a way the business does not like, the business cannot do anything about it and could have damaged relationships with their customers.
WHAT IS PURCHASE ORDER FINANCING?
PO financing is a short-term loan option that provides an advance payment based on a business’s sales in order to help businesses that have sales outpacing their incoming revenues.
These loans are used when businesses need funding to pay for materials or services that will produce tangible goods that have not yet been delivered to the customer. Simply put, it's an advance of money that goes to the supplier in order for the business to fulfill the customer’s order.
Upon completion of the order, the lender will collect their portion of a business’s revenues on that project or service.
PROS AND CONS OF PO FINANCING
Quick access to cash - Applying and receiving notice of approval for PO financing is one of the quickest ways to get funding for your business. Funds can be released by financing companies within twenty-four hours meaning you can satisfy more customer orders sooner.
Easy repayment terms - Purchase order financing is not a loan, so there is no need to worry about expensive interest rates or short repayment terms. Instead, businesses pay the lender as soon as the customer pays the invoice.
No collection risk - The PO financing companies are the ones responsible for collecting the invoice amount from the customer, not the borrower. This means businesses are not at risk if customers fail to make payments.
Upfront fee - There may not be interest when using PO financing, but lenders do demand upfront fees causing businesses to pay the amount before they can get the money they need. These upfront fees vary depending on the size of the purchase order financing company.
High-profit margin requirement - Most PO financing companies require businesses to have a profit margin of twenty percent or more in order to qualify.
Potentially long wait times - Depending on the type or size of the order, businesses can wait several weeks to get approved and funded leading to even longer wait times for customers and customer dissatisfaction.
PO FINANCING AND INVOICE FACTORING: WHICH ONE IS RIGHT FOR ME?
It’s best to ask the following questions when determining the right loan for your business:
- What kind of business do you have?
- What are you using the funds for?
Businesses most aptly suited for PO financing are ones strictly dealing with the purchase of supplies needed to complete a job, like construction and contracting companies.
Whereas businesses looking to collect money on an invoice for completed work might find invoice factoring to be the best option. It’s especially useful if your clients are big companies or government organizations.
HOW TO APPLY FOR PO FINANCING AND INVOICE FACTORING?
Both PO financing and invoice factoring require business owners to supply information and submit an application. It can be a long, tedious, and confusing process.
Instead of doing it alone, use Yardline’s simple application where you’ll gain access to a suite of funding solutions, including SBA loans, small business loans, business and personal credit cards, revolving lines of credit, and so much more.
Once submitted, we’ll be there to walk you through all your options and get you the funding you qualify for (from $5k to $20 million).
Apply for funding with Yardline today and we’ll respond in as fast as twenty-four hours.
