Accounts receivable financing and purchase order financing are two types of business financing that often get confused with one another. It is understandable that most people get confused with these two, however, they are very different types of business financing that serve different purposes.
When you have outstanding invoices on your aging report and you wish to access the cash immediately instead of waiting to be paid at a later date, you will use Accounts receivable financing.
The two types of Accounts receivable financing that are most commonly used are Factoring and Asset Based Lending.
Asset Based Lending
You can attain traditional bank financing or have the alternative business financing which is in the form of asset based lending. If you qualify for bank financing, then go with that route as the cost of capital will be less that the asset based lending. You get to receive a line of credit from a lender and then use your accounts receivable invoices as a collateral.
Each lender has a different underwriting standards but the important thing to remember is that the strength of your company or business will still play a major role in getting approved. Note that you will not get bank financing if your business is losing money, banks can be very conservative.
This is the second form of financing where a third party buys your accounts receivable invoices at a discount so you can receive working capital instead of waiting for 30 or even 90 days to get paid. Factoring is a more flexible method in the sense that you are qualified based on the strength of your clients and not your own financial strength.
Purchase Order Financing
Better known as PO financing, purchase order financing is used when there is need for capital to fulfill and order getting a PO. Small companies that start to receive large orders can go with this type of alternative financing to sustain their business growth. Purchase order financing can only make sense when the profit margins are large enough to offset the capital cost. It can be costly but it is still cheaper than equity.
So, keep in mind that PO Financing is used on the front end of a transaction while Accounts Receivable Financing is used on the other end of a transaction. If your business needs financing for survival or growth, remember you have two types of alternative financing that may be very helpful.