When you need working capital and your business uses invoice billing, the go-to solution is often accounted receivable financing. You can get the cash you need without adding debt to your company’s credit record, and you also get to outsource a portion of the collections process so you also save labor. Financing receivables is not the only way to accomplish this goal, however. Under the right circumstances, purchase order financing can provide you with an even more cost-effective way to access the capital you need.
Similarities Between Financing Methods
Both of these financial products are based on factoring, one of the oldest methods of commercial financing. They are each a little different, however. Being based on the same original product does make them very similar in a few key ways, though. Both require you to have customer orders in one state of fulfillment or another.
Financing accounts and purchase orders also mean directing customer payments to the lender, another point they have in common. There is also the fact that both cash advance methods provide you with flexible capital, and neither shows up as debt on your credit report.
When To Finance Purchase Orders
The biggest difference between the two forms of financing is that purchase order financing is based on outstanding orders and not completed invoices. That makes it an ideal way to raise the capital needed to fund a project’s supplies and labor costs. With the right approach to pricing, you can even use it as a standard method of financing rush orders.
Since rush orders are usually priced to include a premium for the inconvenience, it is easy to fold the cost of financing into the order. This allows you to save your invoices for regular cash flow financing and prevents large and unexpected orders from disrupting that rhythm.
When AR Financing Has the Advantage
As efficient as financing your purchase orders can be, it is not an everyday solution for most businesses. For starters, you need to have purchase orders, which limits this form of financing to manufacturing and trade-based businesses. This also means you usually do not have as wide a collection to finance at once as you would if you were financing invoices.
In the end, purchase order financing can fill in the gap in your financial reach at opportune times, but it’s a good idea to plan to use both accounts receivable financing and purchase order advances to keep cash flowing through your business.
At Speed of Light Funding, we have a great reputation for helping our customers get the business loans they need as quickly as possible. We offer flexible loans that adapt to your company’s circumstances and are easy to qualify for. We’re friendly and knowledgeable, showing you the best commercial finance options for reaching your goals. With the right loan, your business can grow in amazing ways.