If you’re trying to get more information about purchase order financing, you have probably realized that the terminologies aren’t explained properly. To help you along, here’s a purchase order financing glossary you can refer to:
Invoice factoring. In the purchase order, the buyer specifies how long they would need before they can completely pay the amount for the goods or services you’ve provided. You’ll then get an invoice instead of cash. The PO financier or another lender may then forward you a percentage of the value of the invoice, and you get the full amount only when the buyer pays you in full. You then get the rest of your money after the advance, minus the fees charged by the invoice factor.
Letter of credit. When you get financing through your purchase order, your funder doesn’t usually give you cash. Instead, it opens a letter of credit on your behalf. This letter of credit states a certain amount which is then used to pay your supplier when it delivers the goods you need.
Purchase order financing. You will get the working capital you need by using the purchase order as a form of collateral. Let’s say you get a purchase order for $100,000 and the cost of the supplies you need is just $60,000. But if you don’t have the ready working capital to cover the cost of the supplies (which you may have to pay immediately) then you may not be able to produce what’s asked of you in the purchase order. With PO financing, you get the money you need right away.
Purchase order. The P.O. is a legal document signed by a buyer requesting you as the vendor to provide the goods or services the buyer wants. Usually, it contains statements detailing the quantity and the description of the goods and services required of you, as well as a schedule as to when you should provide the goods. The price of the goods is also stated, including the terms of the payment.
Rapid growth rate. Most companies want to grow, of course, but sometimes the growth can be too rapid. If the demand for your goods far outweighs what you can get from your suppliers with your working capital and your available credit, then you may not be able to take advantage of the increased demand.
Sales volatility. This is a business situation in which the sales may have frequent ups and downs instead of a steady flow of sales. This is usually seen in highly seasonal industries, like flower shops and promotional item stores. When it’s a period of high sales opportunities, the orders for your goods may exceed what you can acquire with your current working capital.
Working capital constraints. These are the limits set by your available working capital. A limited cash flow means you will have limited stocks from your suppliers, which then limits the purchase orders you can fulfill. Purchase order financing is designed to enable you to get past these constraints.
There are a lot of terms to understand when it comes to factoring invoices. You might have to understand the differences of factoring accounts receivables from invoice discounting (both are similar but they do have slight differences). You might have to know the different terms and agreements that factoring companies use when dealing with businesses and their clients. In all of this confusion a glossary of basic terms could be very useful. Take the time to consider the following factoring invoices glossary invoice discounting list:
Common Glossary Terms
Accounts receivables – this is your invoice or the sales ledger that encompasses all of your profits from the client
Assignment – this is the official transfer of collection rights to the factor, enabling them to receive the payments (the accounts receivables)
Facility limit – this is the maximum amount that can be factored for a single company. Some factors will set a limit on how many accounts receivables can be bought and sold
Minimum term – this is the minimum contract period; many factors will require that your contract period with your client is good for at least six months
Non-recourse factoring – in this agreement you are 100% insured of debt responsibilities, protecting you from bad debts
Recourse factoring – you are not protected from bad debts and thus collecting the due amount now falls under your shoulders
Sales ledger – the structure that will encompass all details regarding sales invoices
Service charge – this is the processing fee that is required for the factor to assess the invoice and the client’s credit history
Understanding Factoring Invoices from Invoice Discounting
Another factor that a factoring invoices glossary invoice discounting glossary should contain is the difference between factoring invoices and invoice discounting. They are both very much the same since they are all about selling accounts receivables to a factoring company but the main differences lies on control over your ledgers and the visibility of the factor.
When you go for regular factoring the client you work with will be aware of the factor. This is because the factoring company will now be in charge of your sales ledger and will be the ones handling all transactions. They give you the amount indicated in your invoices (albeit at a discount) and will be the ones to collect the amount from your client later on. This means the payment from the client will never even pass through your bank account – they go directly to the factor.
Invoice discounting can seem a little bit more attractive because in this type of factoring the factor is not visible. The client has no clue that you are working with a factor. This means you have full control over your ledger and all of your accounts. It also means that you are now responsible for collecting the amount from the client and then paying the factor for the advanced cash as according to your agreement.
There are a lot of different data that you need to comprehend before finalizing a deal with a factoring firm. This is crucial information that you will learn when you have a reliable factoring invoices glossary invoice discounting guide.