What’s the difference between purchase order financing and invoice factoring?

Looking for cash flow support?

You’re not the only one. Half of all UK-based small businesses sought funding solutions in the third part of 2023, an increase of almost ten percent on the previous year.

When it comes to small business cash injections, there are two solutions many businesses turn to – purchase order financing and invoice factoring.

But what’s the difference between the two and how can you choose the right option for you?

What is purchase order financing?

Growth usually costs money.

This is particularly true when you work with physical products that require upfront production costs before a sale can be completed.

That’s where purchase order financing comes in. With PO finance, a customer makes an order, you apply for finance and if approved, the funds are used to fulfil the order. You then sell the product onto the customer and the lender releases the remaining cash (after their fees and the supplier costs) to you.

What is invoice factoring?

Invoice factoring is designed to smooth out cash flow issues by giving businesses early access to cash that is currently tied up in unpaid invoices, something 2 million UK-based small businesses struggle with according to NatWest.

Many businesses – particularly small businesses in the B2B space – struggle with the 30-day payment terms popular in the industry. Invoice factoring solves this issue by allowing businesses to essentially sell the debt. The lender provides the funds upfront (usually not surpassing 90% of the total invoiced) and then collects payment from the end client.

It’s important to be aware that invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy.

How do they differ?

While invoice factoring is used once the invoice is sent, purchase order financing is used before sales are made. PO financing is designed to support production costs, whereas invoice factoring aids with overall cash flow. Funds are usually released first to the supplier in the case of PO financing, whereas when it comes to invoice factoring, the funds are released straight to you. PO financing can sometimes be more expensive as it’s viewed as riskier.

How to choose the best financing solution for your business  

Purchase order financing might be a suitable option for small businesses attempting to fulfil large orders who may not currently have the cash required upfront to complete production. Invoice factoring is a popular option for B2B businesses who have to wait the standard 30 (sometimes 60, or 90) days before an invoice is paid.

Apply for business finance with Funding Options by Tide

Whether you’re looking for invoice factoring or purchase order financing, we may be able to help. We help connect our users to our network of over 120 lenders, offering between £1,000 and £20M. Just click the link below and fill in the form to find out if you’re eligible.

Find out your eligibility for PO financing or invoice factoring

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.