Guide to Purchase Order Financing vs Factoring
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What Is Factoring?
Pros and Cons of Factoring
Fast form of funding With factoring, you can typically get access to capital much faster than you can with more traditional types of small business loans. Allows you to offer customers attractive payment terms Customers often appreciate long payment terms. Factoring allows you to give them this option yet still access cash right away. Relatively easy to qualify for You can often get approved for factoring even if you have poor or thin credit and no collateral. Factoring companies are generally more concerned about the creditworthiness of your customers, since they will effectively be repaying the debt.
Can be costly By using factoring, you won’t get the full amount of the invoice, since the factoring company takes a cut. Rates can range anywhere from 0.50% to 4.00% per month, which is higher than typical business loan interest rates when converted into an annual percentage rate (APR). Risk involved The longer it takes your customer to pay, the more the factoring will cost. And should they fail to pay, you may have to repay the amount the factoring firm has already paid you. Your customer will know you’re using financing With factoring, your customers pay their invoices to the factoring company, not your company. As a result, they will be aware that you are having issues with cash flow.
What Is Purchase Order Financing?
Pros and Cons of Purchase Order Financing
You can fill orders you otherwise wouldn’t be able to take Even if you're short on cash, you can still serve your customers or handle a sudden uptick in business. Relatively easy to qualify for Purchase order financing tends to be easier to qualify for than other types of small business loans. Purchase order financing companies are generally most concerned about the creditworthiness of your customers and the reliability of your supplier. No loan payments to make Since purchase order financing is more of a cash advance than a loan, you won’t need to pay the money back in regular installments like you would with a regular term business loan.
Can be costly Purchase order financing rates may seem relatively low, often running between 1.80% to 6.00% of the purchase order value per month. However, If you convert it to an APR, it can come out to more than what you pay for other kinds of small business loans. Cost is hard to predict Since fees are charged per month, how much you will end up owing the financing company will depend on how long it takes your customer to pay their invoice. This can make it difficult to estimate the total cost upfront. You lose some control With this type of financing, you’re often cut out of the order fulfillment process. Typically, the lender pays the supplier, the supplier ships the product to the customer, and the customer pays the lender.
Purchase Order Financing vs. Factoring: The Differences
Which Is Right for You?
Qualifying for Purchase Order Financing or Factoring
Alternatives to Purchase Order Financing and Factoring
Small Business Loans
Business Lines of Credit
Compare Business Loan Rates
Frequently Asked Questions
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