What is the difference between Factoring and Purchase-Order Financing?
These two relatively similar funding methods have some key variations. The first and main difference between the two is that PO Financing is only available to product-based businesses, while factoring can be used by companies selling both goods and services.
With factoring, you sell your existing accounts receivable invoices to a factoring company, who then fronts you the money (minus a percentage) and then collects payment from your customers directly. PO Financing works in a similar fashion, except instead of using invoices as your collateral, you use purchase orders.
In both cases, once you sign the funding agreement, the risk is no longer in your hands. If your customers don’t pay, the financing company doesn’t get paid. For this reason, funders usually only want to work with companies who have customers with excellent credit.
The second major difference is that PO Financing limits what you can use the funds received for. With factored funds you can pay employees, invest in marketing, or just sit on the cash. With PO Financing however, you must pay your suppliers to produce the goods specified in the financed purchase order. After all, if you don’t deliver the goods, the financing firm is not likely to be paid by your client!
For more information on how to choose the best factoring or financing company, read this post.