Invoice Factoring and Purchase Order Financing: Which Option is Best For Your Business?

The road to financial success for a small or medium-sized business is not paved with yellow bricks but by securing the right financing option to match a business’s needs—but which financing option is best for your business? Many startups and small to medium-sized businesses cannot secure a traditional bank loan because of a lack of financial history. This is where other financing options, such as invoice factoring and purchase order financing, come in to bridge the gap.

In this article, we will examine the purpose of these types of financing, and help you determine which option is best suited for your business.

Invoice factoring
Invoice factoring is a versatile financial tool for businesses of almost any size and industry. When a business factors its invoices, it sells its accounts receivable to an invoice factoring firm. The factoring firm advances cash to the business and then collects on the outstanding invoices. The balance is paid to the factoring firm minus a service fee.

Is invoice factoring the right option for your business?
Invoice factoring may be the right option for your business if:

● You need more immediate cash flow. Invoice factoring provides businesses with
immediate access to cash, which is crucial for covering expenses or taking advantage of time-sensitive opportunities.
● You want to extend longer credit to customers. Invoice factoring allows businesses to offer longer payment terms to customers without taking a bite out of their cash flows.
● You want to lower bad credit risk. Factoring firms typically handle credit checks on customers, reducing the risk of non-payment for your business.
● You want to avoid debt. Factoring does not incur debt (unlike traditional bank loans).
● You desire to spend more time focusing on core business activities. With the factoring firm handling collections, you are now freed up to handle the core business responsibilities only you can do.
● You need a customized agreement. Factoring agreements can be structured and
customized to meet the specific needs of your business.

Purchase order financing
Purchase order financing is a type of short-term financing that can help your business pay for the inventory needed to fulfill incoming customer orders. In purchase order financing, a business receives an order from a customer, determines the costs, and applies for purchase order financing. If the business is approved, the purchase order financing company will pay the supplier for the order (or a percentage of the order, depending on the agreement), and the business will send an invoice to the customer and the purchase order financing company. The customer will pay the purchase order financing company, who will deduct their fees and then send the business the remainder of the funds.

Is purchase order financing the right option for your business?
Purchase order financing might be the right option for your business if:

● You want to expand your customer base. Purchase order financing enables
businesses (especially small businesses) to accept larger orders and acquire new
customers.
● You need to improve your cash flow. Purchase order financing provides immediate funds to cover supplier costs, which helps your business manage any cash flow challenges and take advantage of great sale opportunities.
● You have a seasonal spike in sales. Businesses facing a surge in orders during peak seasons can use purchase order financing to meet the increased demand without draining their cash reserves.
● You want to grow your business. Purchase order financing creates financial flexibility you can use to expand your business by investing in expansion activities (such as purchasing new equipment or entering new markets).

Both invoice factoring and purchase order financing have the potential to grow your business, free up your cash flow, and help you succeed.

Looking for financing options for your business? We can help. Prairie Business Credit is a national working capital provider to young, growing, or recovering businesses. We offer accounts receivable financing, purchase order financing, and equipment financing. Our company serves both as a trusted financial resource and consultant to entrepreneurs dedicated to building their businesses and ensuring their success.