How factoring differs from accounts receivable financing

How factoring differs from accounts receivable financing

Nowadays, there are many lending options for both small and large businesses. The wide array of alternative lending choices allow entrepreneurs to choose the best financing option for their short-term and long-term financial needs. The numerous lending options have also shortened the loan waiting period. For instance, you can sell the unpaid invoices for your business to get funds during emergencies.

Accounts receivable financing and invoice factoring enable users to get financial aid through their unpaid invoices. Both options are similar, although they have slight differences. This write-up will help you know the main differences between them

Invoice factoring

Invoice factoring is a financing option for businesses with slow-paying clients. The business sells its customer invoices to a third party, which is known as the factoring company or a factor. The business looks for a reliable factoring firm, and they agree on the factoring terms and conditions. If the agreement is successful, the business sells its invoices, which are payable for less than 90 days. In return, the factor pays 70 to 85% of the agreed amount to the business. It then pays the remaining percentage once the borrower clears the loan.

Invoice financing

Invoice financing is also known as accounts receivable financing. It is an asset-based line of credit that allows small businesses’ to acquire loans by using their invoices. The invoices act as collateral for the loan. This means that the lender reviews the invoice to determine the value. If the invoices have a higher value, you can qualify for a higher loan amount. If the lender approves your business invoices, they provide an advance of around 85% of the total value of the invoices. The remaining 15% is settled later.

So what is the difference?

Invoice financing uses the business invoices as collateral for the funds. On the other hand, invoice factoring sells the invoices immediately to the factoring company for cash.

In invoice financing, the borrower collects the invoice payments. In invoice factoring, the factor collects the invoices.

How to choose the best option for your business

Invoice financing is more flexible, and it is, therefore, the best option for small businesses. On the other hand, invoice factoring is ideal for larger businesses. However, it would be best if you considered other factors when choosing between the two options.

Both invoice financing and factoring can help you maintain your cashflows if you have slow-paying clients. Review each of the options, and choose the best according to your requirements, and your preference.