Combining Factoring and Purchase Order Financing

In my last post, I wrote about the benefits of combining factoring and purchase order financing. Generally, combining both products yields a lower total cost. To some, this sounds counterintuitive so today I'd like to expand on that by giving one example with numbers, which will help readers understand this.

Transaction Assumptions
Let's assume that Reseller Inc is buying widgets from China and selling them to a Big Box retailer in the USA. Let's assume that Big Box issued a po for $100 to Reseller Inc. Reseller Inc will need to pay his supplier $70 for the the goods (making the Gross Margin 30% - $30/$100 * 100).  Let's assume it takes 30 days to manufacture  the goods in China and bring them to the US. Likewise, it takes Big Box 30 days to pay the invoice in full.

The purchase order financing plan advances 70% of the $100 Big Box PO and charges 3% for every 30 days. The factoring plan charges 2% and advances up to 80% of the gross invoice.

Using PO financing + Factoring:
1. On day 1, the PO financing company writes an payment covering the $70 cost of goods to supplier
2. On day 30 the goods are  delivered to Big Box along with an invoice for $100
3. On Day 30, the invoice is sold to the factoring company.
4. The factoring company advances 80% of the invoice (or $80), split as follows.
    a) $72.10 to the po financing company ($70 + $2.10 fee. The $2.10 comes from $70 * 3%)
    b) $7.90 to the client
    c) Note that $72.9 + $7.90 = the $80 dollar factoring advance
5. On day 59, Big Box pays $100
6. The factoring company settles the transaction as follows:
    a) $80 to the factoring company (recoup their $80 advance)
    b) $2 fee to the factoring company ($100 * 2%)
    c) $18 is given to the client

Total fees for this transaction are of $2.10 for po + $2 for factoring = $4.10. The client got $7.9 from the factoring advance on day 30 and $18 at factoring settlement for a total of $25.9.

Using PO financing alone:

1. On day 1, the PO financing company writes an L/C covering the $70 cost of goods

2. On day 30 the goods are  delivered to Big Box along with an invoice for $100

3. On day 59, Big Box pays $100

6. The po financing company settles the transaction as follows:

    a) $70 to the po financing company (recoup their $70 supplier payment)

    b) $4.2 fee to the po financing company ($70 * 6%)

    c) $25.8 is given to the client

The client gets $25.8 on day 59 at settlement.

One thing that usually confuses people is that invoice factoring plans and po financing plans are charged differently. The purchase order financing fee is based on the funds paid to the supplier, in this case the $70. The factoring fees are based on the gross invoice of $100 and NOT on the factoring advance of $80.