Accounts Receivable Financing vs. Factoring

Running a business requires you to pay careful attention to your cash flow. In many situations, this is the single most important financial metric. The most profitable business in the world would still struggle if it didn’t have sufficient cash flow. Accounts receivable financing is one option for dealing with cash flow issues when you have high receivables. Understanding how this compares to invoice factoring will help you to find the right financing solution for your business.

AR Financing

AR financing is a broad set of options for borrowing using your accounts receivable. It can include an asset-backed loan with your accounts receivable as the collateral. It can also include selling your invoices.

Essentially, if you are using your accounts receivable to get financing for your business, that falls under this category of financial products. You can finance receivables with banks, factoring companies, private lenders and more.

Invoice Factoring

Invoice factoring is a type of AR financing. It involves selling your invoices to a company at a slight discount. The factoring company then collects the balance from your customers.

This is an option available to almost all businesses that invoice their customers. In fact, it is derived from the oldest known form of commercial finance. If you ever struggle with expenses while waiting for your customers to pay you, this may be a good option for you.

How To Choose

So, you may be wondering whether you should use invoice factoring or another type of AR financing. This can depend significantly on your business’s circumstances.

Factoring has many advantages including its simplicity and flexible qualification requirements. Additionally, it tends to move very quickly. You can find providers that will factor all of your invoices and others that let you pick and choose. There are both recourse and non-recourse (you aren’t liable if your customer doesn’t pay on time) options.

However, factoring means that the factor is collecting from your customers. Plus, it can be more expensive than other options in some cases. So, some companies prefer to borrow against their accounts receivable and then collect from their customers themselves. Both options can be useful depending on your unique requirements.

Learn More

Explore your options for accounts receivable financing today. If your business issues invoices to your customers, this could prove to be a valuable way to support your cash flow needs. However, you will need to determine whether you want to factor your invoices or use another form of financing.