Quick snapshot

Invoice financing and purchase order financing both convert an expected cash event into working capital, but they attach to different points in the sales cycle. Invoice financing converts accounts receivable (money owed to you after delivery), while purchase order financing covers the pre-delivery costs of buying inventory or paying vendors so you can produce or deliver goods.

How each product works (step-by-step)

  • Invoice financing (brief): After you deliver product or provide services and issue an invoice, a lender or factor advances a percentage of the invoice (the advance rate). You receive immediate cash, the factor collects the customer payment, and after fees and any holdback (reserve) the factor remits the balance. Advance rates commonly range from about 70% to 90%, depending on the customer creditworthiness and industry (see related: Invoice Financing).

  • Purchase order financing (brief): When you receive a confirmed purchase order but lack cash to pay suppliers, the PO financer steps in and pays the supplier directly or pays you to buy the goods. Once the order is delivered and the buyer pays, the financer recovers its advance plus fees. This removes the need to use your own capital to buy inventory (see related: Purchase Order Financing: How It Works for Manufacturers and Suppliers).

Typical users and eligibility

  • Invoice financing fits businesses that have delivered goods or services on net terms and want faster access to receivables. Examples: B2B manufacturers, staffing firms, wholesale distributors, agencies.
  • Purchase order financing fits businesses that win large orders but lack the cash to buy inventory or pay production costs. Examples: small manufacturers, importers, seasonal retailers.

Eligibility criteria commonly include: creditworthiness of your customers (for invoice financing), verified purchase orders and supplier quotes (for PO financing), and basic business documentation and bank statements. Lenders underwrite based on the strength of the receivable or the confirmed buyer, not only the borrower’s credit.

Costs, fees, and structure (what to expect)

Costs vary a lot by lender, industry, and deal structure. General patterns:

  • Invoice financing: Fees are typically expressed as a discount or factoring fee plus interest on any drawn balance. Factor fees can range from a fraction of a percent per week to a few percent per month depending on invoice age, buyer risk, and advance rate. Expect additional fees for setup, credit checks, or ACH collections. Many facilities include a reserve (5–30%) that the factor holds until the invoice is paid.

  • Purchase order financing: Fees are often charged as a percentage of the financed order (commonly 1–5% or higher depending on complexity) or as a factor rate. Because PO financing involves supplier payment and order management, additional handling or logistics fees may apply.

Always request a full fee schedule and an example of total cost for your typical order or invoice period to compare offers apples-to-apples.

Sources with practical guidance include the Consumer Financial Protection Bureau and business-focused resources such as Investopedia for common definitions (CFPB: consumerfinance.gov; Investopedia: investopedia.com).

Key differences at a glance

  • Collateral point: Invoice financing uses accounts receivable; PO financing uses the purchase order and the expected sale.
  • Timing: Invoice financing occurs after delivery; PO financing occurs before delivery.
  • Use of funds: Invoice financing gives you cash to run the business; PO financing pays suppliers or manufacturers directly to complete an order.
  • Underwriting focus: Invoice financing emphasizes buyer credit and collections history; PO financing emphasizes the PO’s validity and supplier capability.

Real-world examples (practical scenarios)

1) B2B marketing agency: The agency finishes a $70,000 engagement and issues a 60-day invoice. Using invoice financing, it advances 85% ($59,500) right away to cover payroll. The factor collects the $70,000 from the client at day 60, deducts fees and reserve, and remits the remainder.

2) Seasonal apparel retailer: A retailer receives a large holiday PO for $100,000 but lacks cash to pay the overseas supplier. Using purchase order financing, the financer pays the supplier so goods are produced and shipped. After the retailer sells the items and collects from customers (or after the wholesale buyer pays), the financer is repaid with fees.

Pros and cons: decide with clarity

Invoice financing — pros:

  • Speeds cash flow and smooths working capital.
  • Often easier to qualify if buyers are creditworthy.
  • Can scale with sales.

Invoice financing — cons:

  • Fees and potential customer-notification issues if factoring is not confidential.
  • Reserve holdbacks can delay the final settlement.

Purchase order financing — pros:

  • Enables businesses to accept large orders they otherwise couldn’t fund.
  • Conserves owner capital and prevents missed growth opportunities.

Purchase order financing — cons:

  • Typically more expensive than traditional bank financing.
  • Requires tight coordination with suppliers; failure to deliver can create default risk.

Recourse vs non-recourse considerations

Invoice financing and factoring arrangements may be recourse (you remain liable if the customer fails to pay) or non-recourse (the factor absorbs bad-debt risk for covered credit events). Non-recourse is costlier and usually limited to invoices sold against buyers with strong credit. Confirm recourse terms, dispute handling, and returns policies before signing.

PO financers also protect themselves by verifying POs, confirming supplier pricing, and sometimes requiring partial collateral or personal guarantees.

Tax and accounting treatment (practical notes)

  • Invoice financing: When you sell or borrow against an invoice, the underlying sale stays on your books as revenue; financing is treated as a balance sheet (cash + liability) event. If you sell receivables (true factoring), accountants may remove those receivables from the balance sheet—consult your CPA for treatment specific to your contract.
  • Purchase order financing: Advances to suppliers usually appear as increases in inventory or cost of goods sold, with the financing recorded as a liability. Track fees separately as financing costs for tax reporting.

Always work with your bookkeeper or tax advisor because accounting treatment depends on contract terms and whether the transaction is a loan, an assignment of receivables, or a sale of receivables.

How to choose between them: a short checklist

  1. Identify the cash gap: Do you need money after delivery (invoices outstanding) or before delivery (to buy inventory)?
  2. Analyze customers: Are your buyers creditworthy and predictable? If yes, invoice financing may be cheaper.
  3. Compare all-in costs: Ask lenders for an example worksheet showing advance amounts, holdbacks, and total fees for a typical transaction.
  4. Consider growth strategy: Use PO financing to scale production capacity quickly; use invoice financing to smooth recurring cash flow.
  5. Read the contract: Check recourse, notification to customers, termination fees, and covenants.

Steps to apply (practical guide)

  1. Gather documentation: business formation docs, bank statements, accounts receivable aging, copies of purchase orders and supplier quotes, and buyer credit info.
  2. Request term sheets from multiple providers and ask for a worked example using your numbers.
  3. Check references and online reviews; ask about operational processes (who collects, how disputes are handled).
  4. Review the contract with counsel and your accountant.
  5. Start with a pilot (one or two invoices or POs) to validate timelines and reporting.

Common mistakes to avoid

  • Not comparing effective (all-in) costs across providers.
  • Ignoring notification clauses that require informing customers (which can affect customer relationships).
  • Using short-term financing as a long-term solution without a sustainable plan.
  • Failing to model worst-case scenarios (customer disputes, late payments, or order cancellations).

Professional tips from my experience

In my practice working with small businesses, I’ve seen the fastest wins when owners combine these tools strategically: use PO financing to land new, high-margin customers and invoice financing to smooth the resulting cash cycle while waiting for collections. Negotiate grace periods and dispute-handling language, and always require a sample fee illustration before committing.

Short FAQ

  • Can a business use both at the same time? Yes—many firms use PO financing to fulfill orders and then invoice financing on the receivables produced by those orders.
  • Will these financers check my credit? Typically they focus on the buyer or the confirmed PO and supplier, but many will also review your business banking history and may request a personal guarantee.
  • Is the customer notified? That depends on whether the arrangement is disclosed factoring or confidential invoice discounting. Ask the provider and get it in writing.

Where to learn more (authoritative resources)

Professional disclaimer

This article is educational and reflects general patterns and practices as of 2025. It is not personalized financial, tax, or legal advice. Consult a qualified attorney, CPA, or licensed finance professional before entering into financing contracts.