For service sectors including printing firms, staffing agencies, trucking companies, along with those in the government, construction and manufacturing sectors, these organizations usually bill clients on Net 15 - 60 day terms generating "account receivables" that end up on their balance sheets as assets. The issue, however, is that while the organization is awaiting payment they still have to meet payroll and cover day-to-day expenses. So an organization with outstanding receivables can use Accounts Receivable Factoring as a form of bridge financing.
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.
Purchase Order Financing is similar to Accounts Receivable Factoring, however, it involves a lender advancing money against a purchase order issued by a client of the business owner seeking capital. Once approved, the lender would draft a letter of credit and issue it to the suppliers of the business owner so that he/she can pay for the needed materials to manufacture and complete the order specified by their client.
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