Purchase order financing and factoring are both methods businesses use to manage cash flow, but they address different stages of a transaction and have distinct characteristics. PO financing provides funds to cover the costs of fulfilling a specific purchase order, while factoring converts outstanding invoices into immediate cash.
Purchase Order Financing:
Purpose: Funds the acquisition of goods or materials needed to fulfill a specific purchase order.
Timing: Used before the product is sold and the invoice is issued.
Focus: Based on the purchase order itself, not the creditworthiness of the business’s customers.
Example: A business receives a purchase order for 100 widgets, but lacks the cash to buy the materials. PO financing provides the funds to purchase the materials.
Cost: Generally more expensive than factoring due to the risk associated with financing before a sale is complete.
Invoice Factoring:
Purpose: Converts outstanding invoices into immediate cash by selling them to a factoring company.
Timing: Used after the product or service has been delivered and invoiced.
Focus: Primarily based on the creditworthiness of the business’s customers.
Example: A business delivers goods to a customer and sends an invoice with a 30-day payment term. Factoring provides immediate cash by purchasing the invoice.
Cost: Generally less expensive than PO financing, as it’s secured by a completed sale
Key Differences Summarized:
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Feature
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PO Financing
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Invoice Factoring
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|---|---|---|
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Purpose
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Funds production of goods for a specific order
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Converts outstanding invoices into cash
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Timing
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Before sale
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After sale and invoicing
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Focus
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Purchase order itself
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Customer creditworthiness
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Cost
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Generally more expensive
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Generally less expensive
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When to Choose:
- PO financing: When a business needs capital to acquire goods to fulfill a large purchase order.
- Factoring: When a business needs immediate cash from outstanding invoices.
At First Capital, we provide both Invoice Factoring and Purchase Order Financing to businesses nationwide. Besides standard invoice factoring, we provide specialized factoring to the Construction and Healthcare industries. If you have questions about Factoring or Purchase Order Financing, give us a call where our Business Development Officers stand ready to answer your questions and help you get the fast, working capital your business needs to thrive.