Invoice Factoring versus Purchase Order Funding
Invoice factoring is a relatively simple process. Your credit worthy client receive the product, they are confirmed happy, Paragon verifies a few important facts and you get 80% of the invoice amount now and the balance less the factoring fee when your client pays Paragon.
Your costs including AR management, unlimited working capital, free credit department and credit protection (!) can be 1.0-2.25% per 30 days with Paragon depending on monthly volume, dilution and other risk factors.
Now let us look at PO Funding or a Vendor Guarantee.
This is where you need Paragon to buy the goods for you (Cash against Documents (CAD) or a Letter of Credit) or you need to use Paragon’s credit worthiness for your vendor to release the goods and be paid from the Factoring proceeds (Vendor Guarantee).
Vendor Guarantee is the cheapest because it is the less risky for you and Paragon. Paragon contracts with your vendor to pass enough of the factoring proceeds on to them to cover the vendor’s invoice to you. Thus it costs just .5-1.0% of cost of goods, not the invoice amount like factoring.
Cash Against Doc’s can be FOB China or FOB US. Of course, FOB China is higher risk than FOB US and the money is out longer. Cash Against Doc’s cost can be 2.5% FOB US to 4% FOB China. There is also the real risk of your vendor not meeting quality, quantity and timeliness issues. In addition, unlike Invoice Factoring, PO Funding has the risk of product rejection by the account debtor (your client).
Even though some of your clients will pay quicker and a very few before receipt, you still need Paragon to buy the goods for you pre-debtor (your client’s) approval. This is much riskier and more costly than just factoring. However, it is based on what we have to pay your vendor, not the invoice amount. Also, the higher your deposit to the vendor, the less the total fee.
Note: Your goal should be to get your vendor(s) comfortable enough with you to take a Vendor Guarantee as your costs will then be reduced significantly.