The Slight Difference Between Accounts Receivable Financing and Factoring
When it comes to alternative funding for cash flow problems, accounts receivable financing and factoring are two of the most popular methods for a variety of reasons. Some institutions confuse or combine these methods, but there are some key differences that you will want to consider before you decide on funding. Accounts receivable and factoring differ in how the invoices are used, how your customers are impacted and even how repayment is handled.
How Invoices Are Used
In both accounts receivable and factoring, your advance amount depends on the total amount of the invoices you use. In A/R financing, you retain ownership of the invoices and will do the collections yourself. This can make a big difference in the way that you run your business as well as the way that your customers are impacted. In many cases, you will offer your invoices to an accounts receivable company and investors will choose which ones to give an advance on. A factor, on the other hand, will purchase your invoices from you for an advance of between seventy and ninety percent of the total.
How Customers Are Impacted
Accounts receivable financing can be less impactful on your customers than factoring because the client will still pay you for the work instead of paying the factor. In both cases, there will be some investigation into the creditworthiness of your customers because the A/R company and the factor will both want to be sure that they will be paid back. In some countries, you are not allowed to factor your invoices, so it is a good idea to research which method will be legal in all of the countries where you do business.
How Repayment Is Handled
With accounts receivable, your clients pay you and you repay the advance plus a fee; with factoring, your customers pay the factor and you get back any amount remaining after the advance and fee. This can mean a different impact for both you and your customers and it is a good idea to consider which option would be the best for the smooth operation of your company.
Accounts receivable financing can be one of the best ways to help manage your cash flow to maintain or expand your company. This process differs from factoring in how the repayment is handled, how customers are impacted and even how the invoices are used. The more you research before signing paperwork, the better terms you are likely to get.