Working Capital Options
As a business owner, business working capital is crucial and establishing a steady cash flow is essential. You are generally presented with a set of options.
These options often include invoice factoring and purchase order financing. Now, the big question is, which one should you go for.
Well, let’s get a better look at both options to understand which one’s a better fit for your business working capital requirements. It;s important to recognise that purchase order funding does not suit a lot of business however, invoice factoring, sometimes called debtor finance or just factoring is a big help to a lot of businesses.
Purchase order financing
This is basically a cash advance that is directly paid to your supplier when you are forced to fulfill an order. So, its only use is in a scenario where you require funds to carry forward an order. The initial fee for the first month can be anywhere from 1.8% to 6%. After that, there could be additional costs that are factored in.
In order to qualify, your customer and supplier need to be creditworthy, should have a profit margin of at least 15%, sell tangible goods, and have B2B customers.
If you have a trucking or transport business and need to get finance against your unpaid invoices or unpaid freight notes, then purchase order funding is not for you. Factoring or receivables finance could be what you need.
Here you are provided with a cash advance based on your invoice value. If you have a trucking business it might be called freight note factoring or freight note finance but regardless what term is used, it means getting an advance against the work you have done that you have not yet been paid for.
The percentage of the cash advance available from factoring your invoices and freight notes can range from 70% to 85%. The rest is paid when the customer pays the factoring service. The factoring service will charge a small percentage (1.5% to 5%) of the total invoice value as fees. The factoring finance fee will depend on a number of different factors.
Here, the minimum requirements are that the customer is creditworthy, and the company of a B2B nature. As for the invoices, they must be due in less than 90 days.
As you might have already noticed, purchase order financing works only for businesses that sell tangible goods. A trucking business, on the other hand, is a service. So, obviously, factoring is your ideal solution.
Plus, factoring is cheaper. You pay only the agreed upon fee and nothing else. So it pays for trucking business to look closely at invoice factoring to provide all their business working capital requirements.