Invoice factoring is a different form of financing than purchase order financing. The dissimilarity is based on the work being done and the risks involved. Accounts receivable factoring cannot be utilized until the work is completed and accepted by the customer. Whether providing a service or selling a product, the customer has to be satisfied with the work before the invoice can be financed. The risk for repayment is based on the creditworthiness of the account debtor (customer), therefore it costs less than P.O. financing.
Purchase Order financing is for companies that have a proven track record for performing on a contract. This 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 purchase order has been verified, credit will be extended to help fulfill the order. This usually is in the form of a Letter of Credit issued to the supplier of goods that have been ordered to fulfill the P.O. Once the supplier ships the order, the LOC must be paid off. Therefore many companies use invoice factoring in conjunction with purchase order financing. P.O. financing is based on the performance, so it is riskier and more expensive.