Small business owners are no strangers to cash flow issues. You dream of growing and expanding your company, but unfortunately, the lack of working capital holds you back. For many companies relying on invoices, waiting for months before collecting the revenue that is owed to you is a common occurrence. This could mean you won’t have enough cash on hand to begin the next project. When this happens, you might want to consider purchase order financing, or invoice factoring.
Both purchase order (PO) financing and invoice factoring can be used to help businesses that struggle with cash flow. While these financing options have a lot in common, they differ in a number of ways. Here’s how:
Purchase Order Financing vs. Invoice Factoring
At a glance, PO financing and invoice factoring may seem similar because they’re both financing options for businesses with invoice payments. However, there’s a difference between the two.
Invoice factoring allows business owners to sell pending invoices to a factoring company at a discounted price. The factoring company usually gives 80% to 90% of the total invoice value upfront. Once your customers pay their invoices in full, the factoring company will give you the remaining balance minus a small transaction fee. Remember that your customers must have good credit. Otherwise, it will be hard to find a factor to purchase your invoices.
PO financing has a lot in common with invoice financing, which explains why people confuse them with one another. Rather than selling pending invoices, PO financing lets you sell purchase orders – a commercial document given by buyers to sellers listing, and authorizing the products/services they’re looking to buy. The process of PO financing works similar to invoice financing. You sell your purchase orders to a factoring company, who is turn give you the funds you need to purchase supplies.
2 Important Factors to Consider Before Making a Decision
There are two important factors you need to consider if you’re thinking about taking out PO financing, factoring, or any other type of business loan:
- The reason(s) why you need a loan; and
- The type of loan your company is qualified for.
Knowing why you need a small business loan narrows down your options. If your company has pending invoices and you’re waiting to get paid for the work you’ve already completed, invoice financing is a great option for you. However, your clients should have a good credit history in order for you to qualify.
PO financing is ideal for businesses that need working capital to purchase supplies and materials for a project. If you qualify, PO financing will give you the funds you need to buy the supplies that are required to complete a job.
Purchase Order Financing or Invoice Factoring
As you search for small business loans, it’s a good idea to work with an inside financial expert who can cut through the red tape and help you find the best loan for your business, quickly. Whether it’s purchase order financing or invoice factoring. SMB Compass’ funding experts specialize in helping small business owners like you succeed by providing you with a “just right” financing solution.
Remember, time is money and money is time.
Give us your time, and we’ll help you get the money!