Although it has been around for a long time, alternative finance and its numerous options are new to many business owners. It can be confusing, trying to understand how each option works and which is the best one for your business. This is especially true when comparing PO financing vs factoring. The two are often thought to be the same type of financing. However, it is important to understand how they differ and the advantages each has to offer when making your decision.
What is PO Financing?
PO financing (purchase order financing) is a financing option that provides a business with the funds needed to purchase enough inventory to meet customer demand. For example, you’ve been working hard to grow your business and unexpectedly get a big order from a new customer. Filling this order and building a relationship with the customer could take your business to the next level, but you don’t have enough cash to purchase the necessary inventory. PO funding can prevent you from turning down the order and losing that customer to one of your competitors.
How Does it Work?Â
With PO financing, a third party pays the inventory supplier. Some alternative finance companies will pay for the entire purchase order. Others will require the business owner to pay a small portion of it – typically 20 percent. Once the inventory is received and your customer’s order has been filled, the financing company collects payment directly from your customer. They will deduct their fee from that payment and send the balance to you. Although that fee will reduce your profit margin, PO financing allows you to take on larger orders and grow your business.Â
What Is Factoring?
When comparing PO financing vs factoring, the key difference is who the financing company is paying. With PO financing, they pay your supplier. However, with factoring, the financing company advances funds already owed to you. Let’s say you just filled a customer order and sent out the invoice. Their payment is due in 60 days, but you could use that money now to take advantage of a business opportunity or deal with an emergency. Without the necessary cash, you’ll miss out on that opportunity, or an emergency could bring your business to a grinding halt. With factoring, that doesn’t have to happen.
How Does it Work?
Factoring, also known as invoice factoring, allows you to turn your outstanding invoices into cash before payment is due. You sell those invoices to the financing company at a reduced rate, usually 75 to 90 percent of their face value. The invoices are then owed to the financing company and your customer will pay them directly. Once the payment is received, the financing company will send you the balance minus their fee. Like with PO financing, you will be reducing your profit margin. However, factoring allows you to take advantage of opportunities and deal with emergencies quickly and efficiently.
PO Financing vs Factoring
So how do you decide which is right for your business – PO financing vs factoring? That depends on which area of your business is disrupting your cash flow – paying your suppliers or your accounts receivable. B2B businesses may be able to take advantage of both, while B2C businesses are not eligible for factoring.
The alternative finance experts at CFG Merchant Solutions can help you weigh your options when comparing PO financing vs factoring. They also have other funding options if neither of these fits your needs. Contact us today or apply online to get the funding you need to keep your business moving forward.