Purchase Order & Factoring — Friends or Foes?
At first, they didn’t know how to feel about each other. However, as the years passed, they learned that what binds them together is in fact their differences! Today they live and work together in the world of small business financing.
Many people seem to use the terms PO Financing and Factoring interchangeably, however when you dive a little deeper into the transaction, I will show how they differ and are both complimentary in helping you achieve your growth objectives in the world of small business financing.
The fact is these two financing solutions come into play at different stages of a transaction. Purchase Order Financing is provided prior to the invoicing of your buyer, whereas Factoring helps you leverage your Accounts Receivables after invoicing, allowing you to immediate access your cashflow.
Purchase Order Financing Risks to Analyze:
Because financing is provided before your buyer owes you anything, due diligence must be focused on your company. If you fail to deliver on your end of the contract, the buyer doesn’t owe you anything. So, the only way for a financing company to protect themselves is to understand the following.
1.) Your company’s ability to deliver
2.) Your supplier’s ability to manufacture
3.) The strength of your contract including any cancellation clauses
4.) The strength of your buyer — and their ability to pay you
5.) Any available security you can provide as collateral if all else fails.
Purchase Order Financing provides financing up to 100% of COST.
Factoring Risks to Analyze:
Accounts Receivable Financing or Factoring is available once you have delivered the goods to your buyer and invoiced them. Because of this, Factoring companies focus on the credit worthiness of your buyer and their ability to pay their bills. After a factoring company finances your receivable, they effectively transfer the risk away from you and on to the Buyer. This is great, so you no longer have to chase down your receivables and focus on what you best at — running your business. And in the event of default, they have the right to pursue action against your buyer(s) to collect potentially saving you time and money down the road. Here’s how a factoring company looks at it:
1.) The strength of your buyer — and their ability to pay (Non-Recourse Factoring)
2.) Your buyer and/or your ability to pay (Recourse Factoring)
3.) AR insurance — protecting both you and them
Factoring provides financing up to 85% of the Invoice/Receivable.
What’s my point? really?… I mean seriously…. can you not just see it? It’s a match made in heaven!
Since PO Financing is involved with your COST of sales, profits are only realized when you invoice your buyer. Therefore, by factoring your RECEIVABLE upon delivery, you are able to immediately access cashflow, allowing you to focus on business; reinvest, pay expenses and most importantly, finance your next contract or Purchase Order.
O.M.G… what are you even saying? Please explain this in English… or a visual example!
Since I am weak at graphic design, allow me to provide an high level illustration…
In conclusion, there are multiple ways to finance the same transaction. This all depends on your business need and how much financing you require. Short-Term Financing pricing is reflective of the risk. So, it is important for each company to assess the feasibility of their contract when accessing third party financing. The rule of thumb is to only pursue PO Financing if your margins are 20% or higher.
As always, we are ready to help with any questions you may have with regard to our trade finance solutions.
Here’s to your success!
Elias Beaino
Managing Partner — Bolster Growth Capital
O: 604–332–1884
C: 613–294–6312
