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Purchase Order Financing vs Invoice Factoring

By Annapoorna

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Updated on: Oct 12th, 2022

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3 min read

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Small business owners often struggle with cash flow problems. These problems often lead to issues in carrying on day-to-day operations seamlessly. 

As a business owner, the aim is to continue to grow and expand by taking on larger orders and achieving an increase in production volumes. This is possible through alternate sources of financing such as purchase order financing and invoice factoring, to name a few.

Meaning of purchase order financing

Businesses that are high-growth in nature often opt for purchase order financing so that they are financially equipped to take on large order opportunities. Purchase order financing provides these businesses with adequate funds necessary to purchase materials and other important resources that will enable them to complete a particular project or work order.

Businesses that are in the construction line or manufacturing lines will find purchase order financing to be a viable option for funding. This is because these industries often have the requirement for expensive materials necessary for long-term projects or large work orders.

Meaning of invoice factoring

Invoice factoring is another alternative funding option for businesses that often encounter problems related to cash flows. Invoice factoring helps these businesses meet their short-term finance needs and enables them to carry on their operations without any interruptions or problems.

Businesses that opt for this often have a significant amount outstanding in unpaid invoices that leaves them cash-strapped until their customers make the payment. In these cases, the goods or services have already been rendered and the time offered for payment may be between 30 and 60 days.

However, through invoice factoring, these unpaid invoices may be submitted to the factoring company in exchange for immediate funds. These funds may then be utilised to address their working capital requirements.

Difference between invoice factoring and purchase order financing

BasisPurchase Order FinancingInvoice Factoring
Usage RestrictionsUsed mainly to fulfil the purchase order requirements.May be used in any area of the business - infrastructure, working capital needs etc.
PurposeTo complete the job order or projectTo meet immediate short term finance needs
IndustryMainly in the manufacturing sector or large projects in sectors such as infrastructure and constructionApplicable to all sectors
CostsExpensiveRelatively less expensive
Credit worthinessThe credit worthiness of the buyer that has issued the purchase order will have an impact.The credit worthiness of the customers matters, since the financing company is the one bearing the credit risk.
Profit-marginsIf the borrower’s profit margins are slim, the financing company may not lend them money since they are relatively more risk averse.The profit margins of the borrower do not matter as much to the financing company in this scenario.
About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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