Previously, businesses had no option but to resort to traditional loans when it came to meeting capital shortage and maintaining smooth cash flow. The process to avail such loans, however, is quite convoluted and requires individuals to meet several eligibility criterias.
Nevertheless, with the emergence of alternative funding options like purchase order financing and invoice financing, businesses can now secure funds quickly, and manage their cash flow efficiently. Since both these alternative means of funding serve as effective cash flow solutions, individuals must choose the one that suits their requirement. Other than these, invoice discounting is also a feasible form of alternative financing.
Table Of Contents :
1) What Is Purchase Order Finance?
2) Eligibility Criteria For Purchase Order Finance
3) What Is Invoice Factoring?
4) Eligibility To Avail Invoice Factoring
5) Differences Between Invoice Factoring And Purchase Order Financing
6) Similarities Between Purchase Order Finance And Invoice Factoring
To determine which one among these is most suitable to meet their requirements, businesses need to understand the difference between purchase order financing and invoice factoring to opt for the most viable financing solution.
Following is an elaboration of these financing options, alongside their differences.
What Is Purchase Order Finance?
Essentially, purchase order financing is a funding option where the money is paid to the supplier in advance, so that they can complete a customer order. Typically, suppliers who need capital to fulfill a high-end customer order, seek this type of funding option.
This funding option comes in handy to meet the expenses related to purchasing, procuring, or maintaining raw materials to fulfil a customer order. In this method of financing, businesses create a purchase order following which they approach a financier and establish a Letter of Credit. Subsequently, after the terms of funding are discussed and agreed upon, the financier pays the vendor, following which the business avails the raw materials.
An invoice is raised against the customer, which is then purchased by the financier. Subsequently, the financier deducts the amount paid to the vendor and forwards the remaining balance to the business, as per the Letter of credit.
Eligibility Criteria For Purchase Order Finance:
Businesses meeting these following requirements can qualify to avail purchase order finance –
- Must have creditworthy customers and suppliers.
- Their profit margin should be at least 15% or higher.
- They should sell tangible products.
What Is Invoice Factoring?
Invoice factoring is a method of availing credit or advance that helps businesses to bridge the gap in their working capital cycle. With this funding option, companies utilise unpaid invoices to raise funds, which helps them in meeting their operating expenses.
The biggest benefit of invoice factoring is that it shortens the working capital cycle, and helps bridge the cash flow gap successfully. In turn, it boosts operational productivity and helps generate steady cash flow.
Typically, contractors, equipment lessors, material suppliers, wholesalers, etc. tend to benefit from this financing the most. In short, businesses that have a long working capital cycle find invoice factoring more suitable. The approval for this credit facility depends mostly on the creditworthiness of the customer in question.
Contrary to the popular notion, invoice factoring and invoice discounting are two distinct types of financing. Hence, by checking the differences between purchase order finance and invoice discounting, one might confuse between which one’s better! To resolve such a dilemma, they should know the fundamentals of purchase order financing vs invoice discounting to make an informed decision.
Eligibility To Avail Invoice Factoring:
Businesses are required to meet these criteria to qualify for invoice factoring –
- The invoice should be due in 90 days.
- Must possess creditworthy customer
- Should sell goods or services
Differences Between Invoice Factoring And Purchase Order Financing:
While both invoice factoring and purchase order financing help businesses meet their working capital requirement, they follow a different approach towards cash flow management.
This table emphasises the prominent differences between them, and helps gain a better understanding of – purchasing order vs invoice factoring –
Parameters | Purchase Order Financing | Invoice Factoring |
Timing | Businesses that sell tangible goods opt for purchase order financing before a specific product is sold. | Any business that sells products or services uses invoice factoring once the invoice has been dispatched. |
Amount of funds sanctioned | Businesses can access a large sum of money based on their number of purchase orders. Typically, they avail an amount that they are yet to owe to their business. | Businesses can access an amount that they owe to their business. |
Parties involved | The parties involved are – buyer, supplier, and financier. | The involved parties are – seller, customer, and financier. |
Purpose | It helps to complete large orders quickly. | It helps to meet cash flow requirements instantly. |
Issuance | The buyer creates a purchase order. | The seller creates an invoice. |
Collateral | The purchase order serves as pseudo-collateral. | The receivable invoices serve as pseudo-collateral. |
Besides becoming familiar with the differences between these two funding options, individuals should check out how invoice financing works. Doing so, businesses will also be able to distinguish between invoice discounting and factoring, and gain a better idea of invoice factoring vs purchase order financing.
Similarities Between Purchase Order Finance And Invoice Factoring:
Taking a look at the similarities of these funding options can help businesses be better positioned and make appropriate decisions, when it comes to purchasing order finance and invoice finance.
- Both help small businesses to mitigate problems related to their cash flow cycles.
- They help gain quick and hassle-free access to working capital.
- These financing options are deemed ideal for new ventures and businesses with poor credit.
- The approval of the loan amount for both options largely rely upon the creditworthiness of the end customer.
- Financiers collect payment directly from the customer. Since customers are involved in both financing options, there is no scope for confidentiality.
Businesses looking for a quick working capital solution can avail invoice discounting service from KredX. With our integrated cash flow solutions, businesses can access funds within 24-72 hours* to meet operating capital requirements quickly.
Thus, before selecting a particular financing option, individuals must become familiar with the differences between invoice factoring and purchase order finance. They should also glance through the similarities they share to make an informed decision, when it comes to opting for the most viable financing option.
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