The Difference Between Accounts Receivable Financing and Factoring

When your business is dealing with cash flow issues, there are many solutions available to you. Understanding your options is the best way to select a financing service that best meets your unique needs. In a situation where you are dealing with clients who have not paid for services you have provided, then you might want to look into accounts receivable financing or factoring services. Both of these options have pros and cons to take into consideration when making your choice. Consider these points to select the most practical fit for your company.

Factoring Explained

Factoring is a service that is offered to businesses dealing with unpaid invoices. Essentially, the company that provides this service will take a look at your invoices and determine whether or not they qualify. If approved, the invoices will be purchased from you and a percentage of the total value will be given to you right away. After the full amount has been collected from your client, the company will provide you with the difference. You are charged a fee for this service, which is useful to consider when weighing out your various options.

Financing Invoices

While similar to factoring in a number of ways, there are a few key differences when it comes to accounts receivable financing. For one, you are not selling your invoices to a company that specializes in this type of solution. Instead, you are using the value of the qualifying invoices as collateral to take out a loan. You can use the funds as you see fit, but you are still required to pay back the loan and any interest that accrues over time. You will also still be responsible for collecting the initial debt you’re owed from your clients.

Which Solution is Best?

The option that you select will largely come down to the current state of your company. Some business owners prefer to retain control of the invoices in order to see the full total repaid. Others find it more useful to sell the invoices off and let someone else take care of the responsibility of collecting the debt. Think about both services and see which will help your company get ahead financially.

Services like factoring and accounts receivable financing can be invaluable when your company runs into a snag with the budget. When you have unpaid invoices stacking up, consider these financing options. Select the best fit, improve your cash flow and get back to business as usual in no time.


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