Purchase Order Financing vs. Invoice Factoring: How They Work Together

Manufacturers, distributors and importers often land an order they can’t afford to fill. The customer is good for the money, but the supplier wants payment before it ships, and the customer will pay 30 to 60 days after delivery.

Purchase order financing covers the wait before delivery, and invoice factoring covers the wait after it. On a large order they usually work together. PO financing pays your supplier, and factoring turns the invoice into cash that pays off the PO funding.

What Each One Pays For

Purchase order financing pays your supplier for goods you need to fill a confirmed customer order. The PO funder usually pays the supplier directly, so the money never passes through your account. You haven’t delivered anything yet, so the funder is relying on the order, the supplier’s ability to deliver and your customer’s credit.

Invoice factoring advances cash against an invoice for goods you’ve already delivered. You sell the invoice to a factor, receive most of its value the same day, and your customer pays the factor on its normal terms. The factor sends you the rest when the customer pays, minus its fee.

If you haven’t delivered yet, look at PO financing. If you’ve delivered and invoiced, look at factoring.

Side by Side

One Order, Start to Finish

Here’s how a single order moves through both. The days are illustrative. Your supplier’s lead time and your customer’s terms set the real ones.

Two things make the handoff work. The PO funder needs to be repaid at delivery, and the factoring advance is how that happens. And both parties need to agree on who holds a claim on the goods and the invoice at each step, which is why it’s simpler when the PO funding and factoring are arranged together.

A Worked Example in Dollars

This example is hypothetical, not an offer. It uses the figures from our capital estimator for a wholesale distribution invoice: an 80% advance, with the fee for a customer who pays in 60 days.

A distributor gets a $200,000 purchase order from a retailer. The goods cost $140,000 from its supplier, and the distributor doesn’t have $140,000 to spare.

The total is the $200,000 invoice minus the $140,000 supplier cost and the $9,800 factoring fee. The PO funder’s fee isn’t in these sums because it’s set by the PO funder’s own terms, so subtract it from the $50,200 to get the distributor’s result on the order.

Without either product, the distributor would turn the order down or pay the supplier from cash it doesn’t have. With both, it fills a $200,000 order without putting up the $140,000 itself.

Run the numbers before you say yes to an order like this. The order has to carry both costs and still leave a profit worth the work. Our guide to invoice factoring costs shows how the factoring fee changes with your customer’s payment terms.

When Each One Fits

Factoring on its own

You can pay for the goods yourself. Your problem is the wait after delivery, because your customers pay in 30, 60 or 90 days and you need the cash for the next order, payroll or a supplier discount. This is the most common case, and the simplest.

PO financing, then factoring

The order is bigger than your cash or your credit line can cover, and:

• The goods come finished from a supplier. PO financing fits resellers, distributors, importers and businesses that use a contract manufacturer. The funder is paying for a finished product it can follow from supplier to customer.
• Your customer has strong credit. The order is only as good as the business that placed it.
• Your margin covers both costs. You need enough gross margin on the order to pay the PO funder and the factoring fee and still make money.
• Your supplier is reliable. If the supplier ships late or ships the wrong goods, the whole chain stalls.

When PO financing usually doesn’t fit

PO financing generally doesn’t pay for your own labor, overhead or raw materials you turn into a product in your own plant. Funders want to pay a third-party supplier for a finished product. If your gap is in your own production, factoring the invoices you already have often does more. Work in progress, deposits and progress billing are a separate question, and Sigma looks at each one case by case.

Service businesses don’t use PO financing, because there are no goods to fund. Factoring the invoice once the work is done is the usual answer.

How Sigma Handles Orders and Invoices

Sigma sometimes provides PO funding and advances directly. In other cases, we work with a PO funding partner to get you what you need. Once the order ships and you invoice it, we factor the invoice, and the advance pays off the PO funding.

• No acceptance step, usually. We ask your customer to confirm each invoice is due and payable, with no chargebacks or short-pays.
• No hard concentration limit. If one large customer owes you most of your receivables, we assess the risk for your business rather than apply a fixed cap.
• Deductions, deposits, progress billing and work in progress. We account for each case by case. Tell us how your customers pay when you apply.
• 80–90% advances on most invoices, and same-day funding on invoices you submit after 24–48 hours of onboarding.
• A fee schedule set by payment period, written into your agreement. There are no setup fees, wire fees or monthly minimums.
• A standard 12-month agreement, with a trial period on request and exit terms that can be written in. The agreement has an early-termination fee, and the proposal states it.
• No hard credit pull on your business, and we don’t pull owners’ personal credit reports or scores.

Within 48 hours of your request, you get a proposal with your advance, fee schedule and terms. See what we fund on the manufacturing and wholesale distribution pages.

Questions About PO Financing and Factoring

Can I use PO financing without factoring?

Sometimes. The PO funder has to be repaid when the order is delivered or paid for. If your customer pays quickly or you have the cash, the PO funding can be repaid from that. On longer customer terms, factoring the invoice is the usual way to repay it at delivery.

Does my customer have to accept the goods before Sigma funds the invoice?

Usually not. We ask your customer to confirm the invoice is due and payable, with no chargebacks or short-pays. We account for retail deductions and returns case by case.

Will my customer and supplier know?

Your customer will. A Notice of Assignment asks it to send payment on factored invoices to Sigma, which is routine for most accounts payable teams. Your supplier will know when a PO funder pays it directly.

Does PO financing pay for raw materials?

It usually pays a supplier for finished goods, not raw materials you process yourself. If your cash gap comes from production, tell us how your orders and billing work, and we’ll look at what can be funded.

What does PO financing cost compared with factoring?

They’re priced differently. A PO funder sets its own terms, usually based on how long its money is out before the order is delivered. A factoring fee depends mostly on how long your customer takes to pay. Ask for both in dollars on the same order, and check that your margin covers them.

Can a new business use either one?

Yes, if the customer’s credit is strong. You can sign with Sigma with $0 in sales. We generally look for invoice volume to grow to at least $50,000 a month, which is a growth expectation, not a condition of signing.