Updated: 2nd February 2016
If you’ve ever been stuck in the middle of a business transaction, unable to move forward due to cash flow restrictions, you may find that purchase order finance can help you meet the gap in working capital.
This type of invoice finance differs from factoring and invoice discounting. Its fundamental distinction is the stage at which money is advanced from the lender, and on what basis cash is released.
To explain further, let’s have a look at how other ‘standard’ factoring solutions work:
These two products enable you to access regular amounts of working capital once your customer has received their product order, or the service you offer. When work is complete, you invoice them as normal and receive a cash lump sum from your lender.
It is low risk as far as the lender is concerned. The premise behind invoice factoring and discounting is the release of cash after full delivery of customer orders. Once the customer has paid in full, your lender will send you the remaining balance minus their fees.
This is the basic principle of factoring and discounting. So how does purchase order finance compare, and how can you decide whether it would be suitable for your business?
Companies trading internationally, or those taking on government contracts, could benefit from purchase order finance. International trade often involves working with a third party largely unknown to businesses, simply due to geographical circumstances.
Government contracts are potentially extremely fruitful, but the demands of a large contract introduce significant financial risk to the business.
Once a purchase order has been accepted by your business, it becomes a legal contract, and this is where purchase order finance removes some of the financial pressures of fulfilling the order.
This is a short breakdown of how it works:
Purchase order finance comes with significant risk to the lender, and because of this costs may be higher than with a factoring arrangement. Although your own business won’t need to have an impeccable credit history, detailed checks will be carried out on your customer to ensure that the invoice will be paid.
Any previous business transactions with the customer may also be scrutinised by the lender in an attempt to assess their risk. They’ll be looking for a strong trading history ideally, but from their point of view it is imperative to correctly judge their level of risk on each purchase order finance arrangement.
Real Business Rescue has long-standing contacts in this niche area of finance, and can put you in touch with specialised purchase order lenders. We offer professional guidance on whether this type of finance is right for your business – call one of our team for a meeting to discuss your needs and objectives.