Improving Cash Flow with Invoice Factoring and Purchase Order
Financing
Managing cash flow can be a challenge for many businesses. But
creative funding options like invoice factoring and purchase
order (PO) financing can make the job much easier.
These financial solutions offer convenient, cost-effective and
immediate access to working capital. Invoice factoring and
purchase order financing are suitable for companies in just
about any industry. They can provide financial support to
expand, manage business surges or even meet day-to-day operating
expenses. And they're ideal if your company is newer and can't
obtain a loan.
The Ins and Outs of Invoice Factoring
Invoice factoring is easy to set up and terminate. To qualify,
you should have no existing primary liens or claims on your
accounts receivable. And you must have creditworthy clients who
pay their invoices promptly and in full.
When factoring customer invoices, you can receive quick cash
advances often within 24 hours. Your cash advance is based on
the overall value of the invoices you provide as collateral.
Typically, you can get 80 percent of the invoice value upfront
and the remaining value after your client pays the invoice minus
a three to five percent factoring fee.
Your customers pay the factoring company directly. And the
factoring company takes responsibility including any loss for
the collection of their debts. It's important to note that
invoice factoring is not a loan, so there are no repayments to
make. You are simply using the good credit of your clients to
release your own assets to be put back in your own business.
Historically speaking, factoring is a well-established form of
business financing that produces cash payments at the time of
shipping, delivery and invoicing. Its origin has been traced to
the days of the Roman Empire or even earlier, but the U.S.
factoring industry dates back only about 200 years to the early
nineteenth century. Factoring companies, known as factors,
evolved from U.S. selling agents for European textile mills.
Currently, about 70 percent of the volume of traditional factors
is still in textiles, apparel and related industries that highly
value credit guarantees, according to the Commercial Finance
Association.
Invoice factoring can provide the working capital your business
needs to handle new projects, fill large orders and pay
creditors on time or even early. In essence, factoring can keep
your cash flow running smoothly while your business grows. This
can enable you to stop worrying about finances, and concentrate
on productivity and how to profitably expand your business.
Factoring also can help you avoid wasting time tracking down
accounts receivable or handling bad debts.
Here are some other important factors (no pun intended) about
invoice factoring: - There is no application or set up fee.
- You choose which accounts to finance.
- Invoices eligible up to 30 days from the date of invoice.
- There is no a minimum funding requirement or requirement to
factor all invoices.
- The funds wired directly into your bank account.
- Customers send their checks directly to our lockbox.
Cashing in on Purchase Order Financing PO financing can provide
quick cash flow reserves for manufacturers, importers, exporters
and distributors. This type of short-term funding is used to
finance the purchase or manufacture of specific goods that have
been presold by the client to its credit worthy end customer.
Funding involves issuing letters of credit or providing funds
that allow companies to secure the inventory they need to
fulfill customer orders.
With PO financing, working capital financing is protected by a
security interest in existing purchase orders and the proceeds
of the purchase orders. Normally, the security interest is
perfected by the lender taking possession of the inventory or
raw materials.
PO financing can pay for the cost of your goods directly to your
supplier, freeing up cash for other critical business expenses.
This can help your company ensure timely deliveries to
customers, grow without increased bank debt or selling equity,
and increase market share. To qualify for PO Financing, you must
provide financial information about your company, information
about your buyer and supplier, and buyer and supplier invoices.
PO financing is available for finished and non-finished goods,
although finished goods are generally easier to finance.
Finished goods involve transactions where the goods go directly
from your supplier to your buyer. You never touch them or take
direct possession.
Non-Finished Goods are when you, the seller, take possession of
the goods either in a raw state (such as yarn to make blue
jeans) or a semi-finished state (partially sewn blue jeans). In
either case, you must take possession of the product.
Purchase order financing can help solve a variety of cash flow
dilemmas. Here's a prime example: Your suppliers want you to pay
cash on deliver (C.O.D.) and your buyers want to pay you net 30
to 60 days. You have no cash flow during manufacturing, while
the goods are in transit, and until your invoices are paid.
PO financing may be right for your company if...
- You need additional working capital.
- You lack expertise to handle the financing.
- You need a quick response to an immediate sales need.
- You don't want to incur additional credit risk, be it foreign
or domestic.
- You want your buyers and sellers to not know each other.
- You want the opportunity to make additional profit.
Purchase orders can be used for U.S. and foreign buyers and
suppliers. Consider this scenario involving a U.S. supplier and
U.S. buyer: You're an apparel manufacturer. You've been in
business for six years and have a good profit and loss statement
and balance sheet. You just received a large order and are maxed
out on credit from your suppliers. Your sales price to your
buyer is $100,000 and your total cost to produce the goods is
$75,000. Your gross margin is 25 percent. The financing company
will purchase the goods for you from your supplier, give you 45
days to produce the goods, charge you a 5-percent purchase order
fee ($5000, 5 percent of $100,000) and factor your receivables.