If you’re interested in realizing sales growth for your business, maintaining a steady, predictable source of cash is vital. Even for your goods and services sold in the ordinary course, there’s still a chance that your invoices won’t be paid immediately, leaving you with gaps in your cash flow.
In order to avoid cash flow gaps like this, however, there are third-party services available to fund growing businesses whose sales are dependent upon offering payment terms within the range of 10 to 90 days. These services are designed to help businesses pay their obligations incurred in connection with the sale and delivery of products or services. Among these services are purchase order financing and invoice factoring, both of which provide funds for the purpose of fulfilling orders.
However, there are a few distinct differences between purchase order financing and invoice factoring worth knowing.
Purchase Order Financing:
This service can only be used by businesses that manufacture or distribute tangible products like clothing, furniture, books, etc. Third-party companies that provide purchase order financing cover the up-front costs that the business would pay, such as to a supplier, for the purpose of fulfilling a customer order. Once the business has the necessary funds available to make the payment, they pay back the third-party including financing fees. The finance fee, as well as terms for applying, vary according to the third-party company’s specifications.
Invoice factoring can be used by businesses that provide both services and tangible goods. After the goods or services have been received by the customer, businesses send out an invoice detailing the goods and services purchased, as well as the terms of payment. This creates an account receivable. In today’s business world, the opportunity to make sales is usually dependent upon being able to offer your customers generous payment terms. While this is an effective way of generating business revenue, customers will take time to make payment due on the invoice, leaving the business short of operating cash.
A third-party invoice factoring company acquires the accounts receivable from the business by paying the business up front in exchange for receiving the payment eventually made by the customer account. This allows the business to manage operating costs before payments are actually received from customers for open invoices. The cost of factoring your invoices is a fee earned by the factoring company that is typically equivalent to a discount that you might offer a customer for prompt payment.
Both options can be important considerations for a growing business, especially as costs of operation increase. If you are a distributor of goods, purchase order financing can likely be a valuable solution, especially for online retailers who may receive payment before the product is shipped. Invoice factoring is recommended for companies whose operations rely on invoice payments from customers, which can be a delayed process. Both are valuable solutions to business needs, and can help you maintain your bottom line while you facilitate growth.
To find out more about your options when it comes to invoice factoring, contact Charter Capital today!