The Basics About Purchase Order Financing
For companies that use invoice billing instead of taking cash on delivery, managing the flow of resources through the organization can be one of the biggest challenges, especially during times of growth. Luckily, there are financial tools specifically designed with this contingency in mind. One of them, purchase order financing, represents a low-risk way to get an advance on money you are owed, and depending on the options you look for in a factoring product, it can also provide you with security against customers who don’t pay.
How does that happen? Well, some financing companies offering these factoring agreements include zero recourse clauses as part of their way of making the cash advance package more affordable. Essentially, if your customer doesn’t pay, you are not liable for the debt. These agreements tend to cost a little more than agreements that do not protect you from customer nonpayment, but in the right cases, they are invaluable.
Another point in favor of purchase order financing’s flexibility is the way it lets you outsource your collections process. When you take an advance against invoices, the factor takes over collections on the invoices included in the financing package. You can focus on the core operational tasks your business needs to be managed to thrive and let someone else worry about bringing in payment. This form of financing is also reusable, so you can finance new invoices as you need, giving yourself flexibility whenever your customers and your outgoing cash needs are not fully cooperating with one another.
The precise options you negotiate are very important when you set up factoring agreements because there are pay structures that carry heavy penalties if the customers pay later than expected, but very low costs if they are early. There are also some that charge a flat fee no matter how long it takes them to collect, and not all financing companies will give you a choice between financing all your invoices or just some of them. Many choose to offer just one option.
Purchase order financing represents a great tool when wielded with nuance, because each of those options is the most cost-effective tactic in the right situation, but unless you can find a financing company that offers every option in building a factoring package, you will probably need to work with a couple of them to get access to every possible form of financing your invoices. That’s why researching the companies you want to work with is so important, as is building a relationship through the regular use of one or a couple of favorites.