The main purpose of both purchase order financing or PO and invoice factoring is to provide capital to businesses that have sales outpacing their incoming proceeds. Small business holders must find out about both these financing methods to stabilise their cash flow. The important factor lies when to use what method? In these two methods, there are some common factors and differences that will help anyone recognise their usage.
What Is Invoice Factoring?
This is particularly a loan or advance money when you are waiting for the cash as payment from invoices made on products or services already delivered to customers. It works only after you have successfully sold the goods or services. The cost is around 1.5% to 5% per month. There are some minimum requirements for eligibility from New Jersey invoice factoring companies:
- Creditworthy customer
- Invoices those are due in 90 days or less.
- You have to sell goods or services.
- The customers must belong to businesses or government. B2C customers are not included.
What Is PO Or Purchase Order Funding?
This is advance money to the suppliers for fulfilling a successful customer order. You can use this method only when you will require capital for completing fruitful customer orders. The cost is around 1.8% to 6% per month. You have to bear additional costs after that. The minimum requirements for eligibility are:
- Creditworthy suppliers and also customers.
- Customers must belong to businesses and government. The B2C customers are not included.
- You have to sell tangible goods only.
- The profit margin must be 15% or above it.
Differences between Invoice Factoring and Purchase Order Funding
Invoice factoring is all about credit worthy clients and companies who are willing to bill credit to those clients on terms. They can choose to wait for payment also. The terms of net 10 to 120 days can get advance up to 90% on the invoice. The main fact is that you have to deliver product or service to the client already. After Account Receivable account is created for that delivery, only then any factoring company can buy your invoice.
Purchase order will present a perfect picture of delivering tangible product versus service to the client. This method is taken when you will need capital for reselling your products or services. The cash flow is maintained by PO since you might not have enough money at hand for future sales.
Now comes the part when you will have to measure which method is perfect for your situation. The amount of capital you will need can only be calculated when you prepare a transaction map with excel spreadsheet. You can measure the gross amount and percentage of costs required for sale from there. If funding is small like below 15% then you can choose depending on the creditworthiness of the clients and transaction amount.
From any New Jersey invoice factoring companies you will get to know the basic differences between invoice factoring and purchase order funding. If you have an invoice built after a credit sale to a creditworthy client and do not have patience to wait till the day of payment comes then you can get funding through invoice factoring. Then on the other hand, if you need capital for purchasing goods for future sales and fulfilling an order to clients then purchase order funding in the right method for you.
