What is the Difference Between Factoring and Accounts Receivable Financing?
Across industries, companies are always looking for ways to make sure they have enough working capital. Whether to seize growth opportunities or to overcome unforeseen challenges, businesses can acquire working capital by selling their accounts receivables to a factoring company; another way is by leveraging their unpaid invoices for a loan. Both of these methods allow businesses to get fast access to funds and are alternatives to a traditional bank loan.
If you’re considering invoice factoring or invoice financing, Accord Financial can walk you through both processes to ensure that you choose the best option for your company.
What is Factoring?
Factoring is when your business sells its outstanding invoices to a factoring company. The factor will advance between 75% to 90% as soon as they can confirm the product has been delivered or service completed. This provides immediate cash flow while you wait for your customer to pay the invoice.
With Notification Factoring, your customer will agree to pay the factor directly who will then close out the factored invoices and send you the reserve which is the difference between the face value of the invoicing that the specific advance rate as noted above. Generally, the factoring commission will be taken at the beginning with other charges such as interest or additional factoring as they occur.
What is Accounts Receivable Financing?
Also called invoice financing, accounts receivable financing is a business loan that uses the value of your accounts receivable balance to provide working capital. A finance company uses the value of outstanding accounts receivable as security to advance between 75% and 90% of this amount. Interest is charged on the amounts drawn by your company to finance its operations.
Account receivables are considered assets. This type of financing, therefore, is a form of asset-based lending. Just like factoring, a business owner can use the working capital to:
- Accelerate growth
- Acquire, merge, or invest in another company
Both options decrease the cash flow lag, because businesses don’t need to wait up to 90 days or longer for their customers to pay their invoices.
Now that you understand the basics of how both methods work, here are a few benefits of each one to help you decide on the best financing solution:
- Accounts receivable financing and factoring are both typically quicker to set up than conventional loans; however, factoring is usually the fastest option for accessing added capital.
- Factoring and accounts receivable finance rely on the credit quality of your customers, so a higher leverage within your company is less important.
- Factoring can be structured as off-balance sheet obligations.
- The rates for accounts receivable financing can be lower than those of traditional factoring.
When you don’t have time to wait, accounts receivable financing and factoring are excellent solutions to improve cash flow. If you need help weighing the advantages and disadvantages, Accord Financial can help.
Invoice Factoring and Accounts Receivable Financing that Works for You
Accord Financial provides working capital to businesses with unpaid invoices that are aged less than 90 days old. With factoring or accounts receivable financing, you can easily gain liquidity for everyday operations or one-time projects. Our experts will assess your needs, the level of risk, and the size of the facility to determine a suitable rate.