1. Invoice Factoring versus Purchase Order Funding
By the amount of calls we receive at businesscash.com and pofunding.com, there is much
confusion about the difference between Invoice Factoring and Purchase Order Funding. Lets
walk through the steps of how each work and what types of companies they are each
applicable too.
First, Invoice Factoring is available to any company that bills credit worthy clients and must
give terms or wait to get paid. So if you sell Trucking, Staffing, IT, Consulting, Food, Wine,
Paper, Barbeque Sauce, Bullets, etc. and you give your credit worthy client terms of Net 10 to
net 120 days, we can advance you up to 90% against your invoice.
The key to Factoring is you must deliver the product or service. Until your client takes
possession of the goods and are happy then a true Accounts Receivable has been created and
a factoring company can buy your invoice.
So this brings up the question, what if you haven't delivered the good or service and you
need money? Well Let's talk about service companies first.
An order for guard services, a website, installing cable or IT staffing beats no order, but until
you deliver the service an asset has not been created. At least an asset that you can borrow
money against or turn into working capital. Now you might be able to get an Angel
Investment or an Equity Infusion but that is a whole different kind of money. The type of
money were you have to give up an ownership stake.
If you are providing a tangible product versus a service, PO funding or Purchase Order
Financing might work for you. You will also hear terms like Inventory Financing, Supplier
Financing, Letters of Credit and Vendor Guarantees to describe the funding of your products
to buy for resale versus advancing you monies against products you have already delivered.
How do you go about seeing if you qualify for PO Funding? Well first have your transaction
mapped out. Utilizing an excel spreadsheet is the best way and shows the funding source
you know what you are doing. You should show cost FOB your supplier, freight cost,
packaging cost, markup and selling price. In your spreadsheet show both the gross dollars
and by percentages. If your gross margin is to small, your funding choices will be limited.
What is too small? Typically less than 15%. But that depends on the size of the transaction,
days he money is out and the credit worthiness of your client.
So remember if you generate an invoice and don't want to wait to be paid, Invoice
Factoring is an option. If you don't have the money to buy the goods from your supplier to
fulfill an order, PO Funding or Purchase order Financing might work for you.