What is invoice factoring and what is purchase order funding?

Accounts receivable factoring (also called accounts receivable financing) is a financial transaction and a type of debtor finance in which a business sells its accounts receivables to a third party (called a factor) at a discount. A business will consider factoring accounts receivable to meet its present and immediate cash needs. Factoring is not the same as invoice discounting. Factoring is the assignment of the receivable, whereas invoice discounting is a borrowing that involves the use of the accounts receivable as collateral for the loan. Factoring requires a notification to your customer of the assignment while invoice discounting does not.

?      Factoring is the oldest form of business funding.

?      It’s a billion-dollar industry.

?      Factoring is a great way to grow your business without giving up equity or creating debt

?      Factoring companies look at your customers ability to pay their invoice and not your ability to pay back a loan

?      It is the fastest way to grow your company

?      It can help you monitor your customers credit worthiness and help you make sound credit decisions

?      Factoring helps you grow your business with your own money.

?      It turns your Accounts Receivable into CASH.

?      Factoring can help a business rebuild its credit.

What are the average terms for factoring?

?      Typical advance rates are from 80% to 97%. This is determined by industry, the likelihood of a short payment, the customer’s credit worthiness and the overall risk associated with the account.

?      Factoring discount rates range from 1% to 3% for 30-days. This rate is determined by volume. If the invoice takes longer than 30-days to pay then a fraction thereof is charged for every 10 or 15 days thereafter.

?      12 month terms are typical in the industry but this can be negotiated.

?      There are no monthly minimums and you are not required to factor every customer or every invoice.

?      There are no set-up fee’s

?      We cannot factor invoices that are contingent, on consignment or are guaranteed sales. All sales must be final and cannot be billed in advance

?      We cannot factor invoices that arise from software or are billed to a 3rd party (i.e. Insurance)

?      Owners are required to sign a personal Guaranty

?      We can buy receivables from credit worthy customers only

What is Purchase order funding?

Purchase order finance (also called purchase order funding) is an advance against your customers purchase order to pay your supplier for the cost of goods sold. Funds are paid direct to the supplier via wire or letter of credit. PO funding is done on a purchase order by purchase order basis and you cannot use PO funding to purchase inventory to sell at a later date.

?      It allows you to grow your business fast and take on new orders without worrying about supplier costs

?      It can help you negotiate discounts with your suppliers

?      It’s used instead of supplier terms and a great tool for new companies looking to expand but do not have the credit history to do so.

?      It can help you grow fast without putting in any of your own money

PO Funding terms

?      Advance rates are up to 80% of your customers purchase order amount to cover 100% of your supplier costs

?      PO Funding fee’s range between 2 and 3% of the amount advanced to your supplier for 30-days. If PO funding is needed for more than 30 days then a fraction thereof is charged for every 10 to 15 days thereafter

?      Unless the customer is paying cash on delivery, the client must also factor the invoice

?      PO Funding is not recommended for transactions with profit margins less than 20% or for transactions that last longer than 90 days.

Examples of PO funding

?      Example 1. In this example, the client is selling a well-known product, the client is not touching the product & it is being drop shipped from a well-known supplier to a well-known customer. This is the simplest transaction and relatively easy to approve

?      Example 2: This example is one that requires a contract manufacturing agreement where the client has designed a product line and hires a contract manufacturer to manufacture the product. In this scenario, the funding company must be confident that the client has arranged the fabrication of the product to meet the requirements of the customer and that it will be delivered in the timeframe stated on the purchase order. The supplier is typically paid via a letter of credit. If the goods are first sent to the client’s warehouse for sorting and packaging and then shipped to multiple customers then the PO lender would need to trust that the client can perform this relatively simple task and how they could step in and take over the task if the client failed. It would be preferable if the client was using a 3rd party warehouse for sorting, packaging and freight forwarding. The PO lender would then enter into a warehouse agreement to control the inventory.

?      Example 3: In this example, the client is fabricating, manufacturing or installing the product themselves and they need a PO lender to purchase raw materials for assembly / manufacturing or to install at a customer location. In this example, the funding company must be confident that the client has the skills to build or install according to customer requirement, be able to deliver according to required delivery dates and has the financial capacity to pay the cost of labor and overhead while the work is ongoing.

 Client application process

?      It is recommended to first schedule a call with a representative before completing the application.

?      Once the lender has received the signed application and supporting documents, the file is sent in for approval and then legal docs are issued

?      Once the signed legal docs are received, the file will move into verification. The invoices are collected and approved and a call is made to the client’s customer for verification and assignment.

?      Once the paperwork is verified and assigned the lender will fund the account.

?      The first funding can happen in as little as 48 hours once a complete package is received.

For more information on this topic, please feel free to email or call me

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