When It Makes Sense to Combine Purchase Order Financing with Factoring

When It Makes Sense to Combine Purchase Order Financing with Factoring

Accutrac Capital 0 Comments

Though factoring and purchase order financing are both alternative financing products offered by factoring companies, they aren't the same thing. There are times, however, when it makes sense for a business to combine purchase order financing with factoring on the same sales transaction.

The difference between factoring and purchase order financing

Factoring and purchase order financing share some similarities. For example, neither considers your business or personal credit history and assets when determining qualification for financing. Instead, it's based on the creditworthiness of the customers you do business with. There are, however, distinct differences between the two forms of alternative financing. They include:

  • Factoring: Factoring can only take place once the job is completed, the product or service is delivered and an invoice has been issued. It involves selling your accounts receivable invoices to a factoring company at a discount in exchange for immediate cash. Factoring is also available to a wide range of businesses and industries, where purchase order financing is only available to specific business sectors. Unlike purchase order financing, when you choose factoring there are no stipulations on how the financing provided is used by your business.
  • Purchase order financing: Purchase order financing takes place at the point when you are ready to purchase your supplies. It involves using a valid purchase order from a creditworthy customer to obtain cash to pay your suppliers. Purchase order financing is primarily designed for wholesalers, resellers, distributors and similar businesses that purchase completed product from suppliers to resell at a markup. The funds received from purchase order financing must be used to pay your suppliers. In fact, the factoring company will pay your suppliers directly, often through a Letter of Credit.

When it makes sense to combine purchase order financing with factoring

It's often beneficial to use purchase order financing combined with invoice factoring on the same sales transaction. First, it's important to remember that you must be a company that purchases completed product to resell at a markup to qualify for purchase order financing, and thus, qualify to combine the two.

When you combine factoring and purchase order financing, you benefit from access to cash at two points within the sales process:

  • upon receiving a valid purchase orderÉthe ability to pay suppliers upfront without draining your cash flow.
  • once the invoice is issuedÉready cash to pay operating expenses and grow your businessÉusually within 24 hrs.

By combining purchase order financing with invoice factoring you can complete a sales transaction with virtually no cash upfront. It lets you focus your time on growing your business, instead of worrying about cash flow.

For more information about combining purchase order financing with factoring, visit www.accutraccapital.com.


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