Purchase order financing, purchase order funding, and factoring are often used interchangeably, but they are not all synonymous terms. So, what is the difference?
Factoring allows businesses to sell their accounts receivable to a factor at a discount. There are three parties involved: the seller, the debtor, and the factor. If your business engaged in factoring, you would sell your accounts receivable to the factoring company, and your customer (the debtor) would then pay the balance of their invoice to the factor.
Some of the benefits of factoring include:
- It can come in the form of a cash advance, allowing you to meet current obligations.
- By obtaining cash on an as-needed basis, it allows your firm to keep smaller ongoing cash balances and invest in further growth.
- The risk of collecting receivables is transferred to the factor.
- Your business can save resources by outsourcing collections.
Factoring is similar to PO financing in that they are both methods companies can use to obtain cash, and both are viable options for businesses that need funding immediately.
Purchase order financing can be a better option when a business needs cash to purchase raw materials, manufacture goods, and fulfill a specific purchase order. It differs from factoring because the financial institution involved in purchase order funding provides 100% of the financing needed for the cost of goods. A new receivable is essentially being created rather than being bought for 70-85% of the price.
Some of the benefits PO financing include:
- The financing company assumes the risk of paying your suppliers and collecting the invoice.
- There is less wait time between paying suppliers and receiving payment from customers.
- You can take on large orders that your company may not have otherwise had the capital to fund.
- It is not a loan, and therefore, credit is not as heavily scrutinized in determining whether or not your company is approved.
Factoring and financing do have some similarities that cause confusion, but many businesses are simply unaware of the differences between the two. Before you take part in any form of financing, make sure to understand your options and consult a professional, like Meridian PO finance, to select the best one for you.
If you would like to learn more about your financing options, get in touch with Meridian today at www.meridianpofinance.com or 866-988-6868. Our team can work with your company to get fast, easy approval and provide funds in just a few days. Contact us today for more information!
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