Understanding the relative cost difference between invoice factoring and purchase order financing is dependent on the work being done and the risks involved. With factoring, you cannot finance an invoice until the work is completed and accepted by the customer. Whether you are providing a service or selling a product, the customer has to be satisfied with the work before a factoring company will make the advance. Pre-billing for work not completed will not be accepted by a receivables factoring company. The risk for repayment to the factoring company is based on the creditworthiness of the account debtor (customer), therefore the cost is appreciably less than P.O. financing.
Purchase Order financing is for companies that are selling products. The best scenario is when a company has been around for a while and shows that it can complete the order as a regular course of business. Once the P.O. has been verified, money can be secured to help a supplier fulfill the order. The order is delivered and the P.O. finance security position must be paid off by the factoring company. Therefore many businesses use invoice factoring in conjunction with P.O. financing so the transaction goes through without interruption. Again to be clear, invoice factoring is based on the ability to pay by the account debtor, purchase order financing is based on the performance, and will the borrower fulfill the order? So PO financing is considered to be riskier and more expensive.