Both purchase order financing and invoice factoring are used to improve cash flow for businesses when sales exceed incoming revenue. The main difference between the two forms of funding is when they are used, meaning that they help to manage cash flow in different ways. If you are a small business owner who is looking to stabilize your cash flow, you should understand when to use each of these forms of financing. 

What Is Purchase Order Financing?

Purchase order financing is designed to provide the financing that businesses need to buy the necessary supplies for starting a job or delivering a product. If you find yourself in a situation where you have sales orders but do not have the money to execute the transaction, you can consider selling the purchase order to a lender. The lender will front you the cash you need to secure the inventory you need and collect their portion of the revenues once you have completed the project or service. Some of the businesses that use this financing include manufacturers, distributors, importers, and exporters. 

What Is Invoice Factoring?

Invoice factoring, also known as factoring, is another form of financing that helps to close cash flow gaps. In case you have delivered or service but have not received payment yet, an invoice factoring lender can extend immediate cash for the goods or service so you can continue with your business activities. However, since the loan is issued against an invoice, you have to present a credible invoice to the lender. You can use the money you receive to grow your business, fund new lines of products or services, take advantage of cash buying opportunities, or create supplier leverage.

Generally, the decision over whether to apply for purchase order financing or factoring will depend on the type of business you do and what you intend to use the funds for. 

Identifying the right form of funding for your needs will go a long way in ensuring you maintain healthy cash flow and grow your business. In order to do this, you will need to familiarize yourself with the various business funding solutions available. Simplicity Capital Finance provides loans that fit your business as opposed to the other way around. Contact us today to learn more about our products and services.