The Difference Between Accounts Receivable Financing and Factoring
When you’re looking for a quick way to grow your company and get cash in hand, two popular options are accounts receivable financing and factoring. While most business owners use A/R financing and factoring interchangeably, there are some distinct differences between the two. Learn how to select the best financial opportunity for your company.
Factoring
Factoring works by offering your company a set percentage of your invoice. Traditionally, you’ll have to wait for up to 90 days for your invoice to be paid. This waiting period can cripple many small businesses. A factor agrees to pay a large percentage of the invoice immediately, then will take on the obligation of waiting to collect the payment.
The main benefit of factoring is that you typically sign over the obligation to ensure the payment is received. If your customer is unable to pay the bill, your factor must look for recourse. A/R financing, on the other hand, may leave you with the burden of ensuring timely payment.
Related article: Get Your Money Fast With AR Financing
Accounts Receivable Financing
A/R financing has a few distinct features that can make it better or worse for your company, depending on your situation. A/R financing may give you more cash to leverage and be less strict about the invoices that qualify. Because factoring companies agree to take on the obligation of payment, they only work with reliable customers. A/R financing companies will work with a broader range of customers but may require you to pay the loan back if your customer is unable to pay.
Both financing options allow you to pick and choose the invoices that apply. Ideally, you use these financial tools for short-term cash flow issues, and only for the exact amount of funding you need. Because you have to pay a percentage of the invoice total, there may be situations where you wish to keep the invoice and wait for the necessary 30, 60 or 90 days to receive your payment in full. Over the long term, you’ll retain a larger portion of your income by delaying payments.
Related article: Factoring Agreements: 10 Essential Terms
Compare rates, requirements, and other features today to find out which form of financing is right for your company. Depending on the types of customers you work with, as well as their credit scores, one option may be more lucrative than the other. Ask your local lender at Casey Funding for more information about both types of financing to see if you can grow your company with factoring or accounts receivable financing today.
