Purchase Order Financing vs. Invoice Factoring

In a previous blog, we discussed common freight factoring mistakes that can be made throughout the process. We talked about not fully reading and understanding the details of the contract, errors that can be made with the invoice, and not truly understanding the three-way relationship between you, the factor, and the customers. One mistake that we left out was not understanding the difference between purchase order financing and invoice factoring. For this one, we wanted to dedicate an entire blog to the topic.

Basics of Purchase Order Financing

With Purchase Order (PO) Financing, your company is requesting funds to purchase goods or materials needed to complete a job or project. If approved, money will be sent to your supplier so the goods can be delivered and your employees will then be able to start the job.

This service generally costs between 2 and 6 percent and there are a few minimum requirements to qualify:

  • Both your supplier and customer should have a decent credit score.

  • Your company’s profit margins should be 15 percent or higher.

  • Your business must sell to businesses or government customers

  • The company must sell tangible goods.

PO financing is often less flexible than invoice factoring because the money is only used to pay the supplier and it helps significantly if there is an existing relationship between your company and the supplier.

Basics of Invoice Factoring

With invoice factoring, your company is requesting an advance for unpaid invoices that are pending from clients. The invoices are for products or services that were already completed, and instead of waiting months for payment, a factoring company will advance a percentage of the invoice. This service is best used when your company needs capital to continue workflow.

The cost of this service can range between 2 and 5 percent per month and minimum requirements include:

  • The unpaid invoice is due in 90 days or less.

  • Customers must be business or government.

  • The customer must have decent credit.

  • Goods and/or services are acceptable.

Many small businesses give their customers 30 to 90-day repayment options, but this waiting period can be tricky when the small business needs accessible funds to function. All sorts of companies can use this service, but at Financial Carrier Services, we deal typically with freight or trucking companies.

A benefit of invoice factoring over PO financing is that it costs less because there is a consistent fee from month to month. On the other hand, PO financing fees can increase if customers fail to pay for the goods provided within one month. Invoice factoring can be especially beneficial if your company needs cash quickly. With invoice factoring, money can be sent within a few days, instead of within a few weeks.

At Financial Carrier Services, we seek to make the freight factoring process as simple and as straightforward as possible. In order to do this, we don’t require any contract to be signed and you can use our service as you need it. If you’re worried about your customer’s credit before you work for them, we offer unlimited credit checks to ensure that you’re working with only the best.

Even though freight factoring may appear like a complicated process, with Financial Carrier Services, it doesn’t have to be! Our team has experience in the finance industry as well as transportation, so we understand the importance of having working capital to spend on truck maintenance, gas, and many other things. If you want to learn more about how we can help your company grow, get in touch with us today.

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