ACCOUNTS RECEIVABLE/PURCHASE ORDER FACTORING AND FINANCING
For service sector industries including printing firms, staffing agencies, security guard services, trucking companies and those in the healthcare industry, along with those in the government, construction and manufacturing sectors, these organizations usually bill clients on Net 15, 30, 45 and 60 day terms. As a result, they generate "account receivables" that end up on their balance sheets as assets. The issue, however, is that while the organization is awaiting payment from their clients, they have to meet payroll and cover other day-to-day operational expenses. So to meet daily operational challenges, an organization with outstanding receivables can use Accounts Receivable Factoring or Financing for working capital to cover costs.
Accounts Receivable Factoring involves the merchant selling off their receivables to a lender and receiving an advance of around 80% of the amount of the invoice to use for working capital, then the remaining 20% of the invoice minus a small discount rate, once the client pays off the lender in 15, 30, or 45 days. Once the merchant sells off their receivables to the lender, the receivables in question come off of the merchant's balance sheet as an asset and the merchant no longer owns the receivables. Accounts Receivable Financing involves the merchant using their receivables as collateral to a lender and receiving about 70% - 80% of the amount of the receivables as a short term loan or line of credit. The difference with financing your account receivables over factoring them is that when you finance you still own the receivables and they are still assets listed on your balance sheet.
Purchase Order Financing is similar to Accounts Receivable Factoring and Financing, however, it's a different form of structure. Purchase Order Financing involves a lender advancing money against a purchase order issued by a client of the business seeking the capital. Once approved, the lender would draft a letter of credit and issue it to the suppliers of the business so that the business can pay for needed materials to manufacture and complete the order specified by the client.
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