Factoring and Purchase Order Financing in Canada

Spreadsheets, calculators, and other financial management tools are great for crunching numbers—and for some people that’s enough. But what about those who want to understand how their business works on a deeper level? For those folks, understanding these two key concepts is absolutely necessary. That’s why we’ve taken the time to write this post explaining the difference between factoring and purchase order financing in Canada.

Our goal is to help you determine which method will be best suited for your business so that you can make the right choice. We’ve also compiled a list of factors you should think about when making your decision so that you have all of the information necessary for making an informed choice.

Factoring

The term factoring refers to a financial agreement between a company (the factor) and a customer (the factor’s client). Like the name suggests, once the factoring agreement is signed it becomes an actual financial obligation: the factor has to invoice the customer for all funds that are owed. Under this method, the factor (and only the factor) is responsible for collecting payment. To make things simple, however… all of these payments must be paid in full and on time—so if you're late paying your bills then you'll get kicked out of "the program."

With this type of agreement, there are no hidden fees or surprises. The factoring company does, however, require a percentage of your sales to cover the cost of processing costs. This amount can vary, but it's typically around 2%.

Purchase Order Financing (P.O.F.)

Businesses may also take advantage of purchase order financing—a unique type of financing options that allows you to get paid before your customer pays you. Or in other words: it allows you to get paid twice.

Under this agreement, the client sends their "purchase order" to the factor who then sends an invoice to the vendor (your business). Once the invoice is paid, the factor pays you directly. In this agreement, the factor is typically secured by lien rights to your account receivables—if your client doesn't pay their bill then the factor can collect payment from you.

It should be noted that this type of financing typically requires a much higher interest rate than factoring since there is more risk involved. A high risk yields a high reward. Though the interest rate under a factor agreement is much lower: it's typically between prime plus 0% and prime plus 5%. This means that if your business needs $100k under a POF agreement, you'll pay an interest rate around 3-5% as opposed to 15-18%.

Which Method is Right for You?

In the end, the right type of financing will depend entirely on your situation and needs. The key is to always be clear about what you desire and what will work best for your business. At FactLogic we're here to help you make this decision while also helping you retain better control of your cash flow.

If you're interested in learning more about factoring and purchase order financing in Canada, then don't hesitate to reach out to us. If you have any questions about the information presented here, then feel free to ask us for a detailed explanation.

Sources: http://www.canadianbusinessnetwork.ca/factoring-and-purchase-order-financing-in-canada/

http://www.mckinsey. com/industries/retail/our-insights/the-new-world-of-factoring

http://www.factoringfaq.com/factoring-faq.html#financing_options

http://www.entrepreneur.com/article/232965

http://www.utc.com/aboutus/Pages/Factoring%20Partnership%20Program%20Factors%20Case%20Studies.aspx

https://www.yourbusinesscreditcardblog.com/2010/07/03/factoring-and-purchase-order-financing-versus-debt-financing/

http://www.bctoday.ca/blogs/business_ topics_by_tom_demarchi,8985.asphttp://www.entrepreneur.com/article/232965http://www.factoringfaq.com/factoring-faq.html#financing_optionshttp://www.utc.com/aboutus/Pages/Factoring%20Partnership%20Program%20Factors%20Case%20Studies.aspxhttps://www.yourbusinesscreditcardblog.com/2010/07/03/factoring-and-purchase-order-financing-versus-debt-financing/

This is a guest post by Daniel Klein, Author of The Book on Estimating . Follow him on Twitter @danielklein

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