What’s the Difference Between Purchase Order and Accounts Receivable Financing?
Every company undergoes cash flow problems sometimes. Companies sometimes have a hard time getting off the ground due to the high cost of operating a business. If your company is having difficulty completing a custom order, then you may want to use purchase order financing. While this funding has limitations, there are situations where it’s preferable over account receivable financing.
PO Financing Basics
PO financing happens when a company pays the supplier of another company for the goods to fulfil a job for a customer. This is an advance to cover a portion or even all of the supplies necessary for a project. It allows the company to continue to offer products to customers without interruption. The difference between this and accounts receivable financing is that in accounts receivable financing, you have to deliver the product before you can utilize factoring.
PO Financing Limitations
If you provide a service, rather than a product, you probably won’t be able to access PO financing. PO financing only works when there is a tangible product. With PO financing, you may be able to pay for one hundred percent of the production cost. The only catch is that the financing can only be used in this circumstance. In factoring, you are able to spend your money on any expense that your business needs.
If you want a purchase order financing company to finance your project, you need to have a gross profit margin of at least 20 percent. Invoice factoring is better for those who have less than 20 percent, because you can use invoice factoring to generate more working capital. Once you have 20 percent, then you’ll be able to get PO financing.
There are fees for services that you have to have taken straight from the customer’s invoice. Requirements for PO financing differs based on the company, but most require your client to be creditworthy.
Small Businesses and PO Financing
Often, small businesses will choose accounts receivable financing over PO financing. This is because PO financing usually requires a purchase order of at least 50,000 dollars. Factored invoices, on the other hand, can be between 5,000 and 10,000 dollars. If you need the financing for more than product manufacturing or delivery, then you’ll want to use accounts receivable financing over PO financing.
If you need extra cash flow to finish a project, then purchase order financing might be the best choice for your business. When you know the difference between PO financing and accounts receivable financing, it can help you make the right decision.