AR Financing vs. PO Financing: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on March 4, 2024
AR financing involves borrowing against outstanding invoices, while PO financing is funding based on purchase orders before delivery.
Key Differences
Accounts Receivable (AR) financing and Purchase Order (PO) financing are both financial tools used by businesses to improve cash flow but cater to different stages of the sales process. AR financing, also known as invoice financing or factoring, allows businesses to receive early payment on their outstanding invoices from a financier. This method is beneficial for companies that have delivered goods or completed services but are waiting on payment. On the other hand, PO financing is used when a business receives a purchase order from a customer but lacks the funds to produce and deliver the order. PO financing provides the necessary capital to fulfill the order, making it ideal for companies with cash flow constraints that prevent them from taking on new orders.
AR financing is a way for businesses to unlock cash tied up in invoices that have not yet been paid, PO financing is a solution for businesses needing upfront capital to pay suppliers and cover production costs before receiving payment from their customers. AR financing is typically used by businesses that sell on credit terms, allowing them to accelerate their cash flow by selling their receivables to a third party at a discount. In contrast, PO financing is suitable for businesses that need to pay for the goods or services upfront but do not have sufficient working capital.
The eligibility criteria for AR financing often require the business to have creditworthy customers since the financing is based on the likelihood of invoice payment. PO financing, however, is more concerned with the creditworthiness of the company issuing the purchase order rather than the company receiving the financing. This distinction makes PO financing a viable option for newer businesses or those with less established credit histories, as long as they have reliable customers.
The cost of AR financing and PO financing can vary, with AR financing typically involving fees based on the invoice amount and the time it takes for the invoice to be paid. PO financing costs, meanwhile, may include a variety of fees and interest rates depending on the risk associated with the transaction, the duration of the financing, and the creditworthiness of all parties involved. Both financing options provide valuable liquidity to businesses, but the choice between them depends on the specific needs and timing of the business's cash flow requirements.
AR financing is a strategic option for businesses looking to manage their cash flow more effectively without waiting for customers to pay their invoices. PO financing is a critical tool for businesses that have the opportunity to grow and fulfill larger orders but lack the funds to cover the costs associated with these opportunities. Both financing methods offer solutions to common cash flow challenges, enabling businesses to sustain and expand operations.
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Comparison Chart
Stage of Use
After delivery of goods/services, before customer payment
Before production or delivery, after receiving a purchase order
Based On
Outstanding invoices
Purchase orders
Ideal For
Businesses with credit terms awaiting payment from customers
Businesses needing upfront capital to fulfill orders
Creditworthiness Focus
On the business’s customers
On the company issuing the purchase order
Typical Costs
Fees based on invoice amount and payment time
Fees, interest rates based on transaction risk
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AR Financing and PO Financing Definitions
AR Financing
Borrowing against outstanding invoices.
We used AR financing to cover expenses while waiting for invoice payments.
PO Financing
Facilitates business growth by enabling larger orders.
With PO financing, we could accept bigger contracts confidently.
AR Financing
Offers immediate working capital.
AR financing provided the working capital we needed urgently.
PO Financing
Depends on customer's creditworthiness.
Our customer's good credit made PO financing possible.
AR Financing
Accelerates cash flow by selling receivables.
AR financing helped us improve our cash flow immediately.
PO Financing
Funding based on confirmed purchase orders.
PO financing allowed us to fulfill a large order without existing capital.
AR Financing
Suitable for businesses with creditworthy customers.
Our creditworthy customers made us eligible for AR financing.
PO Financing
Helps cover supplier costs.
We used PO financing to pay our suppliers upfront.
AR Financing
Reduces wait time for payment.
With AR financing, we don't have to wait 60 days for payment.
PO Financing
Ideal for businesses with insufficient working capital.
PO financing was our solution for lacking upfront cash.
FAQs
Who can use AR financing?
Businesses with creditworthy customers and outstanding invoices.
How does AR financing work?
Businesses sell their outstanding invoices to a financier for immediate cash.
Who can use PO financing?
Businesses that need upfront capital to fulfill confirmed orders.
What is AR financing?
AR financing is borrowing against the value of outstanding invoices.
What is PO financing?
PO financing provides upfront capital based on purchase orders.
How does PO financing work?
Companies receive funds to pay for production and delivery costs before receiving payment.
What are the costs associated with AR financing?
Costs include fees based on invoice amount and duration until payment.
Can new businesses use PO financing?
Yes, if they have reliable customers with good credit.
What is the main advantage of PO financing?
It enables businesses to take on larger orders without existing capital.
Is creditworthiness important for PO financing?
The creditworthiness of the issuing company of the PO is key.
What's a common misconception about PO financing?
That it's only for large businesses; small businesses can also use it effectively.
How quickly can funds be accessed with AR financing?
Funds can often be accessed shortly after invoices are sold.
What are the costs associated with PO financing?
Costs vary, including fees and interest rates based on transaction risk.
Is creditworthiness important for AR financing?
Yes, the customer's creditworthiness is crucial for AR financing.
Can AR financing be used by any industry?
Yes, any business with accounts receivable can potentially use it.
Does PO financing require giving up equity?
No, it's a form of debt financing, not equity financing.
Can AR financing improve cash flow?
Yes, by providing immediate access to cash tied up in invoices.
How quickly can funds be accessed with PO financing?
Funds are typically available once the purchase order is verified.
Does AR financing require giving up equity?
No, it involves selling receivables, not equity.
Can PO financing be used by any industry?
Yes, especially industries where upfront costs are a barrier to fulfilling orders.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
