Invoice financing and purchase order financing can be a fantastic way for a business to generate the capital that they need to either pay current bills and debt or grow their business.
For most businesses, the only options they have to infuse capital into their companies are to take out a loan or use profits that they already have on hand. Unfortunately, many businesses won't be able to do either. They may not have been in business long enough for a bank to consider them for a loan. They might also have average or poor credit which also makes it difficult, if not impossible, especially in today's economic times to get a loan.

While there are companies that are already very profitable and able to pay their bills and fund future projects, there are many companies that do not have cash one hand to do so. For these types of businesses, purchase order financing and invoice factoring can be a great option.
Invoice factoring involves selling account receivable invoices to a factoring company. A factor will purchase these for a discounted price, generally between 80% and 95% of the invoices full value. This is only an option if the invoice holder has good credit. If they do not, then it will be very difficult to get a factor to purchase the invoices and do business with them.

Purchase order financing is very similar to invoice financing. However, instead of selling receivables invoices, a company will obviously be selling their purchase orders, which is a promise from another company or individual to buy inventory or a particular service from that company. The entire process would work in much the same way. A factor would come in and offer a percentage of the purchase order.

After a factoring firm buys either the purchase orders or the invoices, they will then collect on them. All money is then returned to the original purchase or invoice owner. The factoring companies will collect a fee that is predetermined and agreed-upon by both parties.

The company that has sold either the invoice or purchase order, benefits because they are able to receive money upfront. This allows them to infuse capital into their company without debt and which will likely be very much needed. Instead of waiting for the invoice to be paid, they are paid much sooner, often times within seven days of selling the invoice or purchase order.
As a result, they get the money they need which allows them to maintain their business or even grow it. The factoring companies benefit because they are paid a percentage of the invoices for their services.