Many question the difference between purchase order financing and invoice factoring. Here we will explain the difference and when each form of financing is used.
Purchase Order Financing
Purchase order financing is for importers, wholesalers, and distributors of goods who receive a purchase order (PO) from another business, and need financing to pay their supplier or manufacturer for the finished goods. As an example, we’ll use a toy company that is selling to a big box retailer. The toy company receives a PO from the big box retailer.
The company has the toys manufactured in China, but doesn’t have the capital to pay the supplier at the time of shipment. The PO finance company will pay the manufacturer for the finished goods, upon proof of shipment, because the toys are “pre-sold”. Once the goods are imported and delivered to the big box retailer, the PO finance company will be reimbursed for the cost of goods, retain a small fee for service, and remit the remainder to the toy company.
It should be noted that Purchase Order (PO) Financing is not factoring or discounting of a purchase order, as it is not simply a cash advance on the PO. Instead, the PO finance company issues payment for the tangible goods directly to the supplier, and can generally cover freight, customs and duties as well. This is done in order to assure fulfillment of the PO, and therefore payoff to the PO financier.
Invoice factoring can be used by any B2B business that invoices for products or services and has to wait 30-60 days to be paid by its customer. It is used after services are provided or goods are delivered. If we refer back to the toy company example, let’s assume the big box retailer has 45 day payment terms. Once the toys are delivered to the retailer and the PO is fulfilled, the invoice can then be submitted to the invoice factoring company for immediate cash. The cash advance from factoring an invoice can be used by the business for anything the capital is needed for (e.g. payroll, marketing, inventory, taxes, etc.)
How PO Financing & Invoice Factoring Can Work Together
Purchase Order Financing is used to fulfill an order for tangible goods and invoice factoring can be used afterwards for immediate cash flow upon delivery to customer. A company can utilize a combination of purchase order financing and invoice factoring to satisfy a customer PO and generate working capital for the business before the customer has even paid for the order. These alternative financing services help growing companies take on more business and generate much needed working capital to succeed in today’s business environment.
Why Work with Riviera Finance
Riviera Finance has been providing businesses financing through invoice factoring for almost 50 years, and helps facilitate purchase order financing solutions through a sister company, International Trade Finance. Contact your local Riviera office to learn more.