Accounts Receivable Financing vs. Factoring: Which Option is Best For Your Business?
Two of the ways that you can secure working capital for your company are accounts receivable and factoring. These methods are so similar that they can often be confused for each other or used interchangeably in discussion, but they are different in a couple of key ways. For instance, accounts receivable is a permanent arrangement while the other one is more temporary. One involves transferring your invoices to a third party and the other functions more like a line of credit.
What Are They?
Factoring and accounts receivable both involved selling your outstanding, but not overdue, invoices to a third-party to do the collecting. This does not usually involve checking your credit and only rarely involves the credit of your customers. Many companies, especially in repair or manufacturing, will do the work and deliver it to the customer while giving anywhere between one and three months for the invoice to be paid. With both of these financing options, you are getting a high percentage of the invoice value now and letting the third-party collect on the invoice when it is due.
What Are the Benefits?
The main benefit of both these options include having the capital you need for your next big project, for your regular bills and for expanding your company. Neither of these methods rely on the credit score of either you or your business and instead will rely on your invoices. This can be very helpful for the small business which has had a limited time to try and build credit. You can usually receive funding from these financing options more quickly than from other methods.
What Are the Differences?
The biggest difference between these two options is that accounts receivable financing is an on-going arrangement with a third-party company while factoring is not. This means that you can have more flexibility of when you use a factor for your invoices, but you will have a higher impact on you and your clients. With accounts receivable, your invoices are used as collateral for a secured loan and once you are paid, you pay back that loan. Instead of interest, however, the amount you pay back will be a set percentage higher than what you borrowed.
Factoring can help you get temporary relief from the crunch of your bills without having to sell your invoices long-term. This is the biggest difference between that finance option and accounts receivables which functions much like a revolving line of credit. Both methods can help you bridge the gap between getting the work done and getting paid for it.