Factoring and accounts receivable financing are terms often used interchangeably in business discussions. Though there are similarities between the two types of financing, there are notable differences as well. Knowing the differences between these two types of financing can help you determine which, if either, is the best option for your organization to get the financing it needs to achieve its goals. Fortunately, the differences can be easily understood.
Factoring is a way of receiving financing through the sale of unpaid invoices. In this situation, the organization sells the unpaid invoices to the financial institution and receives the money for them. At this point, the transaction is complete. However, this also means that the organization cannot collect on those sold invoices. Instead, they become the property (and responsibility) of the financial institution that purchased them. Collecting payment for the unpaid invoices fulfills the payment for the financing provided.
Accounts Receivable Financing
Accounts receivable financing uses the receivable as collateral for the financing. That is, the organization borrows against unpaid invoices to get financing. This can be an effective way to get financing if there are unpaid invoices that will be paid soon. However, since the organization keeps the receivable, it is the organization’s responsibility to get payment on the unpaid invoice. In this sense, accounts receivable financing is more in line with a traditional loan, though it uses the accounts receivable to help determine the amount of the financing.
Whether you need extra capital for your budget or to invest in a new project, factoring and accounts receivable financing are two options that many organizations use. Knowing the difference between these two types of financing can help you decide which is best for your organization so you can get the financing you need using the method that is best. With the right financing, you will be able to move forward to achieve your business’s goals and objectives.