Purchase Order Financing

There are companies that will lend money based on customer orders, or purchase orders, received. Usually the purchase order has to be guaranteed, meaning the customer cannot return the goods unless the merchandise is defective or the order is in error. The customer has to have good credit. And the order has to be over a certain dollar minimum. The lender will fund only from 50% to 60% of the purchase order amount. And the interest rate is high, up to 3 to 4 points a month. As soon as the goods are delivered to the customer, the money loaned is due to the lender. Your company should have excellent margins in order for purchase order financing to make sense. Purchase order financing has drawbacks, but it does let a company fill an order it may not otherwise be able to.

Factoring And Accounts Receivable Financing

There are a number of different ways factoring can work. You can sell a specific customer account receivable, less a discount, directly to the factoring company. They then are responsible for collecting on the account. The account now actually belongs to them, not you. And your customer is informed of that change of ownership by notification.

You can also sell a group of receivables. Or the factoring company can lend you money based on a specific receivable or group of receivables, or the money can be loaned on a percentage of your total accounts receivable balance that are no more than 30 days outstanding. This line of credit loaned on your receivables is called asset based lending.

Again, factoring and asset based lending, can be expensive, the interest rate and related fees can be high, up to 4 points a month, -- that translates to 48% a year. The lending company is more concerned with your customer’s credit worthiness than yours. You also lose control over some of the cash flow of the company. Payment for the receivable can go directly to the lender. They deduct the amount of the loan and their fees and then remit the remainder to you.

Purchase order financing and factoring can work in tandem. The initial order is financed through the purchase order financing. When the order is shipped, it becomes a receivable. That receivable is then factored and the money received from the factor is used to pay off the purchase order financing. When the customer pays the invoice, the receivable is released. The time span from receiving the order to receiving payment from the customer can take from 30 to 120 days. These types of financing can provide capital in that interim period.