Purchase order financing vs invoice factoring
These are not alternatives — they are consecutive. Purchase order financing pays your supplier so a confirmed order can be produced; invoice factoring advances against the invoice once the goods are delivered. If you cannot afford to make the goods, you need the first. If you have delivered and are waiting to be paid, you need the second. A business fulfilling a large order on long payment terms frequently uses both in sequence, with the factoring advance repaying the purchase order facility.
Start an applicationSide by side
| Best for | Purchase Order Financing: Fulfilling a confirmed order you cannot fund — Invoice Factoring: B2B businesses with slow-paying clients |
|---|---|
| Typical range | Purchase Order Financing: Up to $5M per order — Invoice Factoring: $50K – $5M |
| Speed to funding | Purchase Order Financing: Days — Invoice Factoring: 3–7 days setup, same-day after |
| Cost | Purchase Order Financing: Quoted per order — Invoice Factoring: 1.5–4% of invoice |
| Collateral | Purchase Order Financing: The order + end-customer credit — Invoice Factoring: A/R is the collateral |
Choose Purchase Order Financing when
- You hold a confirmed order you cannot afford to fulfil
- A supplier wants paying before production or shipment
- The goods do not exist yet, so there is no invoice to advance against
- The end customer is creditworthy and the margin covers the cost
Choose Invoice Factoring when
- The goods are delivered and the invoice is issued
- Customers pay on thirty, sixty or ninety day terms
- Payroll or suppliers come due before the customer pays
- You need a revolving facility rather than order-by-order funding
When both make sense
The two-step structure is the normal one on a large order: purchase order financing produces the goods, the invoice is issued on delivery, and factoring the invoice repays the purchase order facility. Arranging both at the outset is cheaper and faster than arranging them separately mid-order.
Where they must not be mixed is on security. Both lenders take an interest in the same transaction, so who holds what has to be agreed in writing before either funds.
Frequently asked questions
Can I use factoring to pay my supplier?
Only if you have already delivered something else and hold an invoice to advance against. Factoring converts an existing receivable; it cannot fund goods that do not exist yet. That gap is exactly what purchase order financing covers.
Which one is cheaper?
Factoring, generally, because the risk is lower — the goods are delivered and accepted, and the only remaining question is when the customer pays. Purchase order financing carries production and performance risk on top of that, and is priced accordingly.
Do I need both for every order?
No. If you can fund production yourself, factoring alone bridges the payment terms. If your customer pays on delivery, purchase order financing alone closes the gap. Both are only needed when you can neither afford to produce nor afford to wait.
Related
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- Equipment Financing vs Business Line of Credit — Buy the machine on equipment financing and keep the line of credit for working capital.
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- CIBC business term loan vs Term Loan — A CIBC business term loan is the cheapest way to fund a defined, one-time capital need, and a bankable file should apply there first.
- National Bank of Canada receivables-secured operating facility vs Invoice Factoring — For a Quebec business with a diversified receivables book, a National Bank operating facility is cheaper than factoring and easier to run in French from end to end.
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