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What Are the Best Tips for Purchase Order Factoring?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 30 September 2016
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Purchase order factoring is a solution for companies that struggle to maintain cash flow. Many companies buy goods on account, meaning they have 30 to 60 days to pay for the goods. Suppliers who only accept cash on delivery, however, can create cash flow problems. Tips for purchase order factoring include finding multiple companies offering this service, looking for the lowest rate charged by the factor, and negotiating repayment terms. Each factoring company may be different, resulting in a variety of potential agreements.

Companies that use purchase order factoring must find a finance company willing to pay a company’s suppliers directly. Rather than the company using cash every time to purchase goods, the factor pays for them first. The company then repays the factor over time. Essentially, this is a third-party transaction that alleviates cash outflows for the purchasing company. The frequency of factoring may be an issue with this process.

Multiple factoring service vendors are often necessary when a company wishes to engage in purchase order factoring. The ability to constantly fund multiple purchases is a common request for companies. The company’s business credit may also be an issue when factoring purchase orders. A company with a historical record of late or unpaid bills may affect the ability to engage in the factoring process. Shopping around for the best factoring option may take some time for the company as it wants the best deal possible.

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Factoring services may charge different rates for purchase order factoring. This may be a variable rate based on purchase order amount, a fixed fee for different dollar intervals, or some other rate applied to the purchase orders. Factoring is essentially a short-term loan that has an interest rate applied to the outstanding purchase order balance. Finding a factoring service that offers the best rate depends on the options available and the cash flows for the companies factoring purchase orders. In some cases, a factoring service may offer smaller discounts as the company engages in higher amounts of purchase order factoring.

Negotiating rates and repayment terms is another tip for this business process. Whenever money is involved in a transaction, companies can certainly negotiate a deal with factoring services. Everything should be on the table during the negotiating process. Companies need to negotiate interest rates and fees, repayment length on outstanding invoices, and the ability to draw funds when necessary. Purchase order factoring may also be available through online banking transfers, giving the company more options.

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