The Difference Between Purchase Order Financing and A/R Financing
At first glance, purchase order financing and accounts receivable financing seem almost identical. They both are used primarily when a business is struggling with cash flow or needs money now. Additionally, they involve getting an advance on future income. However, there are some important differences. Understanding the benefits of each can guide your decision making.
When you finance a purchase order, the financier pays your supplier for all or most of the supplies you need to fulfill the order. For example, if you have an order for 100 widgets and only have the funds to buy supplies for half the order, you could use P.O. financing to help pay for the remaining half. In turn, the financier gets paid when the customer pays for the order.
There is a financing fee, as you may expect. However, this is an advance against your purchase order rather than a loan. This can be a great option if you are in the product supply chain.
P.O. financing is less optimal for service businesses. In many cases, financiers will only work with organizations dealing intangible products. Furthermore, the funds can only be used for supplies for that invoice. This is a great way to avoid turning down an order but there are limitations.
With accounts receivable financing, you are either getting an advance on your invoice or selling it to the factor. Like P.O. financing, this helps you avoid taking on debt or selling equity to get money. You are using your future income to secure the funds you need today.
In many cases, the factor will collect directly from your customer. This has the advantage of helping you ensure debt collection. Additionally, the decision is based on your customer’s credit rather than your own. Therefore, A/R financing is ideal for businesses that have less-than-ideal credit.
Which Is Better?
Typically, A/R financing is more flexible and can be used no matter what you are selling. Furthermore, you can use the funds for more varied purposes. However, you may be able to get a better deal on P.O. financing because it is more restrictive and focused. The right choice depends on the needs of your business.
Discover more about purchase order financing and accounts receivable financing to determine which is better for your business. Both can be very valuable when you need cash to invest in delivering to your customers.