Purchase Order Finance Vs. Factoring: Which One Makes Sense for You?


By Bibby Financial Services

27 Nov 2017

Looking into the details of PO Finance and Factoring to find the best solution for your business.

You’ve built your business and established a solid customer base with a sales history you can project from and build on.  Most of your suppliers offer a discount for early payment, but you can’t pay them until you get paid by your customers. You’ve reached the point where it’s time to seek outside funding to maintain the pace you’ve set or to grow to the next level.

You have more options than you think

When considering your options, your first thought may be to go to a bank and apply for a loan.  Even if you’ve received bank financing before, or sought a bank loan and were denied, your business may qualify for other types of financing that are based on customer transactions rather than your or your company’s credit history. In this article, we’ll look at two of the oldest, and yet still misunderstood, forms of commercial finance available: purchase order finance and invoice factoring.

Buy with a little help

Purchase order finance allows a company to finance an order to its supplier against a purchase order from its customer. If your customer sends you an order you can’t fulfill because you lack the cash to pre-pay your supplier, then your purchase order finance company would pay the supplier on your behalf.   Your supplier would then produce and ship the order, and you would collect payment from your customer and then pay your finance company a fee for their service.

Aside from the obvious benefit of being able to fulfill larger orders, the beauty of PO finance is that the finance company is more interested in your customer’s and your supplier’s credit history than that of your business. The downside is that in order to qualify, you must be reselling a product that is manufactured and shipped to your customer by your supplier without your ever having touched it.  For manufacturers, fulfillment centers, transportation companies, service providers, and many other businesses, PO finance is not an option.

Don’t pay your customers to pay you

Also known as accounts receivable financing, the factoring of receivables enables you to collect on your invoices without waiting out customer payment terms – perfect for businesses with slow-paying customers or those who need a constant supply of cash to keep employees paid and other expenses covered.  Factoring can be less expensive than offering a discount to your customers for early payment and is a great fit for companies in many industries including staffing firms, manufacturers, service providers, even trucking companies and freight brokers. Any business that generates an invoice to another business is a potential candidate for factoring.

Much like purchase order finance companies, factors are more interested in your customers’ credit and payment history than that of your business. This is because once the invoice has been verified by your customer and the factor has advanced to you the agreed-upon amount for that invoice, the factor will then collect payment from your customer. After your customer pays the factor for the invoice, the factor then pays you the remaining balance less a fee. If you don’t like the idea of your customers knowing that you’re working with a factor, look for one that offers non-notification factoring of receivables.

Bibby Financial Services has representatives throughout North America who would like to learn more about your business, discuss our value proposition and customize a solution to help with your cash flow challenges. Contact us today at marketing@bibbyusa.com or 877.882.4229.

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