Both P.O. financing and factoring are useful tools to fund fast growing companies when traditional sources of financing are not available. It`s OK to plan to use them provided you know when and how to use them and understand their cost.
P.O. financing is used to cover the cost of goods sold before delivery of the product. Factoring is used to accelerate the cash due from invoices generated after the delivery and final sale of goods and services to creditworthy customers.
While you don`t have to use P.O. financing to use factoring, to use P.O. financing you must use factoring or arrange for some other "take-out" financing once the goods and services are delivered and the invoice is generated.
P.O. financing may be a bit challenging to get for a startup - depends on who is actually producing and delivering the goods and services. It will be easier if you`re simply taking orders and a third party will be responsible for manufacturing and fulfillment/delivery.
Factoring is more readily available for start-ups as the factor is primarily looking to the credit strength of your customer buying the product.
As for relative cost, P.O. financing can typically cost from 3.5% to 5% per 30 days. P.O. financing can cover up to 100% of cost of goods sold. Factoring is usually less expensive and ranges from 2.5% to 4% per 30 days. Advance rates range from 60% to 85% of the face amount of the invoice. Due to the cost of these funding solutions, you want to make sure that your gross margins are pretty high as the interest costs associated with these products could eat up about 12-15% of your margin in a 90 day cycle.