Two commonly confused types of business financing solutions are invoice factoring and purchase order factoring. Both enable the quick funding that many businesses need when their sales exceed incoming revenues. However, the way each manages cash flow is different.
Purchase Order Financing
Purchase order financing provides upfront cash so that a business owner may acquire the raw materials or supplies needed to complete a customer’s order. The financing agent directly pays your supplier. Then, once the goods are received by the customer, they pay the agent the total cost. The finance agent then deducts their fees and forwards you the remaining sum of the proceeds from the purchase order.
Typical businesses that benefit from purchase order financing are:
Wholesalers
Manufacturers
Distributors
Importers, and
Exporters
Invoice Factoring
Invoice factoring, on the other hand, is the selling of your unpaid sales invoices in return for a quick lump-sum payment. The financing agent pays out a major portion – generally 90% or more – of the total sum of the invoices sold.
The capital received is not a loan and does not have to be paid back. Instead, it is a payment for the invoices you sold. Because of that, there are no fixed repayment sums owed as in the case of a traditional loan.
It can be ideal for businesses that have already sold goods or services but haven’t yet received payment. You can use the money as your business sees fit. Many businesses use invoice factoring in the following ways:
To grow the business
To fund new lines of products or services
To create supplier leverage
To obtain vendor discounts, or to
Take advantage of buying opportunities
Do you need more information on either of these two popular funding sources? If so, please contact Capital Funding Source at your earliest convenience.
