Did you know that only 42% of small businesses meet their financing needs?
Funding your business is essential for the growth and stability of your company.
That is why “Purchase Order Financing” vs. “Purchase Order Factoring” can be your closest ally in maintaining the positive balance of your business.
In this article, we will review their key differences and explain which could better suit your business needs and why.
Let’s start!
Purchase Order Financing is a type of business funding in which capital is required for tangible goods that your customer wants but you currently don’t have the product.
For example, PO Financing is a smart financial option if your business relies on outside suppliers or if your startup wants to keep its growth.
Purchase Order Factoring is a form of debt financing service that allows you to sell your clients' unsettled bills to third-party companies (factors).
For example, if you already sold your goods to the customer but did not receive a payment, factoring can provide you with an advance for unpaid invoices.
Later in this text, we will discuss what requirements you need to meet to be able to use PO Factoring.
While both purchase order financing and factoring can help you meet your working capital needs, they take different approaches to cash flow management and have different requirements and cost structures.
Let’s see what the key differences are.
The first difference that we will talk about is cash flow management and how the customer and supplier work with your company and financier.
Let's take a look at how PO Financing goods and cash flow works:
Step 1: PO financing usually requires you to have a customer order before you can apply for financing.
Step 2: When you give your purchase order to your supplier, they will give you an estimate of how much it will cost to fulfill the order. This can include shipping, distribution, and delivery costs, as well as other production costs.
Step 3: Once you apply for PO Financing and your application is approved after meeting necessary requirements, your supplier is paid by the financing company.
Step 4: After your supplier has been paid, they will manufacture, assemble, and typically deliver the goods to your customer.
Step 5: Your customer has received their goods from the supplier, and you can now send them an invoice for payment. The length of time it takes the customer to pay can affect how much the financing will cost you.
Step 6: Finally, after your customer pays the PO Financing company, the fees are deducted and the remaining amount is issued to your company.
With PO factoring, goods/services and cash flow are handled as follows:
Step 1: Factoring requires the product to be delivered and an invoice to be issued to the customer.
Step 2: If you need funds sooner than your customer can provide to cover expenses or maintain daily cash flow, you can apply at PO Factoring companies.
Step 3: The factoring company receives the payment from your customer, deducts its fees, and issues the remaining balance to your business as the final step in the process.
To be eligible for one of these two types of financing for your company, you must meet certain criteria.
Let’s look at how the requirements for PO Financing vs Factoring differ.
PO financing requirements are:
Requirements for PO Factoring are:
PO Financing and Factoring have different cost structures in addition to different cash and goods flow and criteria.
Let’s go over the cost structure in more detail.
PO Financing fees typically range between 1% and 6% per month, and they are calculated on a per-30-day basis.
This fee is based on the total cost of the suppliers' costs and generally increases the longer your customer takes to pay their invoice.
Example:
💡 If you need $50,000 from a Financing company to cover the expenses, and the financing company charges a 2% fee every 30 days, your total fee for that time period will be $1000.
This amount is paid only if you want to repay the entire amount of $50,000 within the first 30 days. If it takes 60 days, the fee will be 4% which is $2000, and so on, increasing the fee percentage as the repayment period lengthens.
Some PO Companies may use a fee structure and adjust the default 2% fee after the first 30 days based on the length of the repayment period.
Myos specializes in PO Financing based on transparency.
You can access the calculator on Myos’s website in two clicks and see an estimate of how much you need to repay without any hidden fees. It's an informative type calculator, and you can contact us for more information.
Many lenders charge fixed fees for the duration of the loan. In that case, you will not benefit from repaying the loan faster.
Factoring fees are divided into two categories:
1. A discount fee is a fee charged by a factoring company for factoring an invoice.
It is usually calculated as a percentage of the invoice value and ranges between 1.5% and 5%.
Only the funds advanced are subject to the discount rate, and it’s frequently calculated as an annual rate and then charged weekly or monthly.
It is essentially an interest rate on the advance provided by the invoice factoring company.
2. A service fee is essentially an administration fee that factoring companies charge for various services related to invoice processing and management.
It is typically between 0.5% and 2.5% of the invoice value factored.
The precise figure is determined by additional cost-influencing factors:
1. Transaction size and volume, as a factoring company's fees can be reduced if you have a higher volume of invoices.
2. The industry in question, as some have a higher risk rate than others.
3. Your company's credit history and financial stability.
4. Your customer's financial stability may also have an impact on the fees.
5. The period of time your client committed to pay for goods or services.
6. Your company's relationship with the factoring company.
Different types of businesses are better suited to different types of funding.
In the table below, you can see if your business is better suited for PO Financing or PO Factoring.
Apart from the businesses listed in the table, your company can still be eligible for one of the funding types if you meet the criteria for the preferred one.
Before deciding which funding option is best for your company, take a look at the advantages and disadvantages of each type of financing.
Purchase order financing and purchase order factoring are two different types of financing that can help businesses manage their cash flow or fulfill customer orders.
While they have some similarities, such as providing funding without the need for traditional bank loans, they also have significant differences.
PO Financing seeks to provide funds for the fulfillment of customer orders, whereas PO Factoring involves selling invoices to factoring companies in exchange for immediate cash.
Even though both types of financing can seem expensive, if you use them correctly, they can help your business grow.
Myos is a financial provider that offers custom funding options for businesses according to your needs.
We offer Purchase Order Financing within a reasonable time frame with affordable fees and multiple additional repayment options.
Here are the benefits that Myos offers:
✔️ No manufacturer contact: We do not require any information about suppliers or customers, preserving your competitive advantage.
✔️ No personal guarantee: Other financiers will require you to pledge your personal equity, such as your home. As security, Myos only assigns a portion of your goods.
✔️ Flexible payment: When you settle the financing is entirely up to you. Repay in accordance with your turnover.
✔️Quick verification: We focus on your products rather than the usual paperwork that banks require.
There is no need for any documents or personal information.
You can apply in 5 minutes.
We conduct AI product testing using open data.
Simply enter your product's ASINs or EANs and tell us how you scout and fulfill orders to receive an offer within 72 hours!
Sign up today and receive a free, non-binding offer.
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