Two of the most popular alternative business funding solutions are invoice factoring and purchase order funding. Business owners are increasingly turning to alternative lenders – like Security Business Capital – for solutions to cash flow and inventory needs. These financing solutions provide working capital without an added burden of debt. If any international funds need to be sent to them, they can use wire transfer companies like XE to help them get the funds they need safely and securely.
The Benefits of Invoice Factoring and Purchase Order Funding Explained
For the business struggling to maintain sufficient working capital for growth and/or to pay suppliers upfront for materials, it can be a challenge to find a business funding solution that meets your specific needs. If your business or industry is “high risk” in the eyes of a traditional lender, finding a cash solution becomes even more complicated. Many turn to an alternative lender, like Security Business Capital, and their financing options. Two of these increasingly sought after business funding solutions include invoice factoring and purchase order funding.
What is Invoice Factoring?
Dating back to ancient Mesopotamia, factoring is the oldest form of business funding. Accounts receivable factoring (also referred to as accounts receivable financing, AR funding or invoice factoring) is a financial transaction that involves a business selling its accounts receivables to a third party (called a factor) at a discount. The factoring company then quickly advances the working capital needed against the business’ unpaid accounts receivable; thus, the factoring company is offering the business money it has already earned.
The main reason businesses consider factoring is so that they can meet present and immediate cash needs. By looking into the possibility of using factoring companies, you’ll be able to meet your financial goals, sustain productivity, generate cash to support growth, fund expansion and improve overall cash flow. Your business will also have the working capital it needs to purchase needed materials/equipment and cover payroll. Factoring offers a great opportunity to grow your business, without giving up equity or creating debt. If your struggling with a credit issues, factoring can also help your business rebuild its credit.
A billion-dollar industry, factoring is used successfully by many different industries, including: manufacturing/distribution, business services, transportation, oil and gas, among many others. The support the factoring company offers can also help with monitoring the creditworthiness of customers and in making sound credit decisions. Unlike working with a traditional lender, the factoring company examines the customer’s ability to pay their invoice – not your ability to pay back a loan. There are no monthly minimums, and the business is not required to factor every customer or every invoice. There are no set-up fees, and funds are available in as little as 24 hours. If you’re looking for more information and strategies on invoicing, then you can visit Techavy.com where you can also be offered free invoice templates.
- Typical advance rates are from 80% to 95% (rates are determined by industry, the likelihood of a short payment, the overall risk associated with the account and the credit worthiness of the customer.
- Factoring discount rates range from 1% to 3% for 30-days, and are determined by volume.
- If the invoice takes longer than 30-days to pay, a fraction is charged for every 10 or 15 days after the due date.
- 12 month terms are typical in the industry, but this can be negotiated.
What is Purchase Order Funding?
Without sufficient working capital, a business will be unable to accept large orders or pay suppliers upfront for materials. Purchase order finance (also known as purchase order funding or PO funding) is an advance against your customer’s purchase order that allows you to pay 100 percent of your supplier costs. PO funding takes place on a purchase order by purchase order basis. The funding company agrees to pay your supplier directly – via cash or credit – for the materials you require to complete the job. Once the goods have been delivered to your customer, the funding company then factors the invoice and issues a second advance of funds to you, minus the PO funding advance and funding fee. When your customer pays their invoice, the payment is sent to the funding company. The funding company then deducts the advance and discount fee, and you are given the difference.
Each job requires supplies, paying personnel and covering all related expenses. Because you will not be paid until after each job is completed, taking on even bigger jobs may be impossible to do. Rather than depleting cash reserves or declining orders, PO funding can help your business continue to grow and to take on new orders – without worrying about supplier costs. The funding company can also help you negotiate discounts with your suppliers. All in all, your business gains the flexibility to focus more on its opportunities and potential.
This funding option is a great tool for new companies looking to expand, but do not have the credit history to do so. It also benefits start-up companies, companies experiencing rapid growth, companies in turnaround mode and companies being reorganized. Ultimately, PO funding provides manufacturers and distributors – and many other types of industries – the funds they need to fill orders and purchase inventory when they are unable to do so on their own. (Keep in mind that PO funding cannot be used to purchase inventory to sell at a later date.)
- Advance rates are up to 80 percent of your customer’s purchase order amount.
- PO Funding fee’s range between 2 and 3 percent of the amount advanced to your supplier for 30-days (if needed for more than 30 days, then a fraction is charged for every 10 to 15 days thereafter).
- PO Funding is not recommended for transactions with profit margins less than 20% or for transactions that last longer than 90 days.
- Unless the customer is paying cash on delivery, the client must also factor the invoice.
What is the Typical Funding Timeline?
Before completing an application for invoice factoring or PO funding, it is recommended that you first schedule a call with the funding company you are considering. This open Q&A session will help identify which product is right for you, and what the proposed terms would be if your application is approved. While it’s impossible for the funding company to know exactly what your rate will be until you fill out the application, you will receive an estimate based on the company’s historical data.
The application will include a simple checklist for funding. Only a few items are required to make an initial determination and form a proposal. Once the funding company has received the signed application and supporting documents, the file is sent off for an initial review. If accepted, a proposal is issued to the business for consideration. Upon acceptance of the signed proposal, the funding company will secure the remaining open items needed for underwriting.
During this stage of the process, searches are ordered and documents are sent to the business for execution. Once the signed documents are received, the file is moved into verification. A copy of the invoices/purchase orders that the business wishes to fund are then collected, and the assignment and verification process begins. Once the paperwork is verified and assigned, the account receives the funds. An account executive is then assigned to handle subsequent funding’s; this individual will offer training in the funding company’s online system, along with any further help needed to submit future funding requests.
Invoice factoring and PO funding both offer businesses a financing solution that allows them to steer clear of high interest rates and costs. Instead of adding a burden of debt, the business can use the money it has already earned to grow, expand and stay ahead of the competition.
Security Business Capital Funding Solutions
Security Business Capital (SBC) is a traditional factoring and purchase order funding company with years of experience. The team of experts at Security Business Capital specialize in helping companies secure the funds they need to operate smoothly, grow their business and take advantage of opportunities – minus the high interest rates and costs. With SBC, there are no hidden fees, no closing costs and no origination fees; just one, low rate that is clearly explained and covers all our services. There are no monthly minimums, and our clients are not required to factor every customer or every invoice. Temp staffing, oil and gas, transportation, manufacturing and distribution, business services and government are just a few of the industries SBC provides services to. We understand what it takes to run a business, and we strive to be a valuable partner to you.
If you’d like to learn more about Security Business Capital’s funding options, contact Carolyn McClure for a free quote and/or consultation at cmcclure@mysbcapital.com or 312.804.9072
