Purchase Order Financing vs Invoice Factoring: Before vs After Delivery

Purchase order financing and invoice factoring solve similar problems — getting cash when you need it, not when customers pay. But they work at different stages of your fulfillment cycle.

PO financing helps you fill orders you cannot afford to fulfill. Invoice factoring converts completed invoices into immediate cash. The timing difference matters.

The Fundamental Difference

How PO Financing Works

Purchase order financing bridges the gap between receiving an order and getting paid:

• Step 1: You receive a purchase order from a customer
• Step 2: The PO financing company advances funds to pay your suppliers
• Step 3: You fulfill the order and deliver to your customer
• Step 4: Customer pays (often directly to the financing company)
• Step 5: Financing company deducts fees and remits the remainder to you

How Invoice Factoring Works

Invoice factoring accelerates payment on work you have already completed:

• Step 1: You deliver goods or services to your customer
• Step 2: You issue an invoice with standard payment terms (net 30, net 60)
• Step 3: You sell the invoice to a factoring company at a discount
• Step 4: The factor advances 80-95% of the invoice value immediately
• Step 5: Your customer pays the factor when the invoice is due
• Step 6: The factor remits the remaining balance minus fees

Cost Comparison

Both options have significant costs — here is a realistic comparison:

When to Use PO Financing

PO financing makes sense when:

• You have a large order you cannot fulfill — The customer is ready to buy, but you lack supplier funds
• Margins are healthy — You need 25%+ gross margin to cover financing costs
• The customer is creditworthy — Lenders evaluate your customer, not just you
• Traditional loans are too slow — Banks cannot move fast enough for the order
• The alternative is losing the order — Something is better than nothing

When to Use Invoice Factoring

Invoice factoring works best when:

• Work is done but payment is slow — Net 60 or net 90 terms strain cash flow
• You need ongoing working capital — Factoring can be continuous, not one-time
• Customer credit is strong — Better customer credit = lower factoring fees
• You want to avoid debt — Factoring is asset sale, not a loan
• Growth is straining cash — More sales mean more receivables to factor

Combining Both

Some businesses use PO financing and factoring together:

• Step 1: Use PO financing to pay suppliers and fulfill the order
• Step 2: Once delivered, the invoice becomes an asset
• Step 3: Some PO financing companies also factor the resulting invoice
• Step 4: Or transition to standalone factoring once you have completed invoices

Real Scenarios

Scenario 1: The Big Retail Order

Situation: A major retailer orders $500,000 in products. Your supplier needs $350,000 upfront, but you only have $100,000 available.

Solution: PO financing. Get the supplier paid, fulfill the order, and capture the margin. Without PO financing, you lose the opportunity entirely.

Scenario 2: Slow-Paying Clients

Situation: Your consulting firm has $200,000 in invoices outstanding with net-60 terms. Payroll is next week.

Solution: Invoice factoring. The work is done — factor the invoices to get cash now. No PO financing needed because there is nothing to fulfill.

Bottom Line

The choice depends on where you are in the fulfillment cycle. Need to fulfill an order? PO financing. Already delivered? Factoring. Both are expensive compared to traditional loans, but both solve real timing problems that banks cannot.