Factoring Receivables and Purchase Order Financing are great alternatives to bank loans.
Purchase Order financing is a short term financing option used to cover the cost of manufacturing or purchasing goods that have been pre-sold through a Purchase Order.
Factoring Receivables, on the other hand, advances a large portion of the value of an invoice immediately after the product is delivered to the customer.
Although Factoring Receivables and Purchase Order Financing have many similarities, there are five important differences.
1. The Costs of Capital. While rates will vary, the cost of PO financing typically ranges between 4-11% as compared to 1-4% rates for factoring receivables.
2. Required Profit Margin. If your business is one where profit margins can be slim at times, then PO financing may not be an option. On the other hand, factoring receivables will work well for companies where profit margins are lower or are affected by seasonal fluctuations.
3. Service Based Companies. One of the down sides to PO financing is that it is not applicable to service based companies as there are no tangible goods; factoring receivables is better suited for service based companies.
4. What Funds Can Be Used For. While PO financing can finance up to 100% of the cost of producing a product, including materials and labor, funds can’t be used for anything else. With factoring receivables there are no restrictions on what the capital can be used for.
5. Supplier Requires COD. If a supplier requires payment as COD, then PO financing will be the best route for a company.
While purchase order financing and factoring receivables are clearly different, their purpose is the same: to create cash flow that supports business growth.
To learn more about either purchase order financing or factoring receivables contact Universal Funding today.
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