AR Financing vs. Factoring: What’s the Difference?

Tapping the value of your invoices can be a great way to regulate cash flow and to keep working capital on hand for your next unforeseen opportunity, but not every method of doing that is built the same. Factoring and accounts receivable financing are often thrown around as equivalent strategies because both provide you with a portion of the invoice value for a fee, but that is where the similarity ends for the most part. Each is built to a very different purpose, and which one is best depends a lot on your business model and size.

Advantages To Factoring

Of the two financial services, factoring is the older. AR financing is based on its model, but factoring invoices today is very different from the type of factoring practiced in antiquity and the Middle Ages. Today’s factors buy invoice debt outright, assuming the risk of collecting on the bill so you can take it off your books. This means your company can totally outsource its receivables process if you’d like, and that is advantageous to small companies and especially one-person operations.

Factors also take predictable fees, making it possible for you to roll the costs into your future quotes, preserving your bottom line. Best of all? They provide you with the power to set your own income schedule with pay dates you can count on.

Advantages to Accounts Receivable Financing

AR financing offers most of the same advantages as factoring. It does outsource a great deal of your collection process, but it does not take your invoices off your books. Instead, you get a cash advance against them. If customers pay on time, the fees are less than those involved with factoring, so you get a second-round payment that can be taken as profit or added to reserve capital, in addition to the advance up front that you can use for working capital.

Financing your accounts does involve a little more bookkeeping than factoring, but some lenders allow for a rolling AR financing deal that allows you to quickly submit and cash out invoices with fast approval for customers known to the financing company. That makes it easy to get paid whenever you need to, without waiting for a from-scratch approval like a first-time applicant.

Make the Right Choice

If minimizing the cost of capital is the most important thing, then you need to consider accounts receivable financing as your top option, because the only way its costs reach those of a factor is if you have a lot of penalties due to late payments from customers. Factoring is ideal if you need to minimize your administrative work and focus on your core business. That should make the choice easy.