Having sufficient cash flow is important for every business no matter how large or small. However, smaller organizations often face more volatile situations that come up when cash flow is interrupted. Fortunately, there are ways to get the cash you need to continue operating efficiently. Some of the options you have include purchase order financing and accounts receivable funding. Both have their advantages, and both are going to work well in different situations. It is important to understand the differences so that you get the right type of cash flow coming into your company.
PO financing is used when your business needs to provide a product to a customer, but you do not currently have it. You would then need to acquire this financing in order to obtain the item from another company. PO financing essentially states that you have a customer willing and able to buy the product, so upon the sale you will pay back the supplier with the funds you received. It allows you to keep offering products to customers without any interruption in business.
Although purchase order financing typically has some fees associated with it, you can often avoid these fees if you pay off the outstanding balance within a reasonable amount of time. This method of financing is generally not available to companies that offer a service rather than a product. PO financing is limited to the production of tangible goods.
Accounts Receivable Funding
Certain companies utilize invoices to bill customers for a product. Your business gives the individual the item, and then that person has a set amount of time, generally 30 days, to pay you back. This is a viable way to entice customers to make a purchase, but an issue that can come up is that the individual does not pay you back within the given amount of time. This is where accounts receivable funding comes into play.
You can sell your invoices to a factoring company. That company provides you with the money the invoice was worth right away, minus a fee, and then that company becomes responsible for contacting the customer to pay off the invoice. To do this, you actually need to make the sale first. Therefore, PO financing comes into play before the sale is made while accounts receivable funding becomes an option after the sale.
Different types of financing will work better for your business at different times, so review all your options thoroughly. This allows you to know when it is best to get accounts receivable funding and when it is ideal to get purchase order financing.