Accounts Receivable Financing (or Purchase Order Financing) are two types of alternative financing for business that can be confused. Although it is understandable that they can sometimes be confused, they are two completely different types of alternative financing that serve very different purposes.
Accounts Receivable Financing can be used if you have outstanding invoices and wish to access the cash immediately instead of waiting for payment. NOTE: Accounts Receivable Financing is only available to those who have delivered the product or service and invoicing. Otherwise, there are no collateral accounts.
Two types of Accounts Receivable Financing are most common: Asset Based Lending (Factoring) and
- Asset Based Loan – Traditional bank financing and alternative financing can be obtained through asset based lending. Bank financing is a good option if you are eligible. The cost of capital will always be lower than traditional asset-based lending. A bank or non-bank lender will give you a line and your receivables invoices will be used as collateral. Every institution has its own underwriting guidelines. However, it is important to remember that your company’s strength will still be a factor in approval. Bank financing will not be available if your company is in financial trouble. This is because banks are more conservative than non-traditional lenders. Non-traditional lenders will still need to approve your company for financing. However, they’ll be less strict than traditional lenders and must have certain covenants attached to the line to ensure it stays open.
- Factoring is a type of financing in which a third rd person purchases your accounts receivables invoices at a discounted price so that you can get working capital immediately instead of waiting for the payment to occur. Factoring is flexible than asset-based lending because you are qualified based upon the strength of your clients and not your financial ability.
Purchase Order Financing PO Financing is also known as PO Financing. This is when capital is required to fulfil an order once a PO has been received. This type of financing can be used to support growth for smaller companies that receive more orders. PO Financing is only appropriate when the profit margins are sufficient to cover capital costs. Although it can be expensive, it is still less than equity.
Remember that Purchase Order Financing can be used at the front end of transactions, while Accounts Receivable Financing can be used at the back-end. These two types of financing can be very useful if your company requires financing to grow or survive.
