Many business owners get confused about the difference between invoice factoring and purchase order financing. The difference is relative to the work being done and the risks involved. Accounts receivable factoring can only be used when 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 the invoice can be financed. Pre-billing for work is unacceptable. Here, for a factoring company, the risk is based on the creditworthiness of your business customer. Can the customer fulfill the obligation to pay their invoice on time.
On the other hand, purchase order financing is for companies that have a proven track record for performance. When a company has been around for a while and shows that it can complete the order as a regular course of business then it is a good candidate. Once the P.O. has been verified, a letter of credit will be issued to the supplier guarantying that they will be paid upon shipment of the order. And when the order is delivered the P.O. funder’s letter of credit must be paid off. The letter of credit only secures the shipment from the supplier; it does not provide the capital advance necessary to pay off the PO finance company. Therefore many companies use invoice factoring in conjunction with P.O. financing so that the order goes through without interruption. P.O. financing is based on the performance, so it is riskier and more expensive.
Knowing when to use either accounts receivable factoring or P.O. financing is important. If you need help, get in touch with us here.