What is the Difference Between Factoring and Accounts Receivable Financing?
🆚 Go to Comparative Table 🆚Factoring and accounts receivable financing are both methods that provide businesses with cash based on their outstanding invoices. However, there are key differences between the two:
- Ownership of Accounts: With accounts receivable financing, your business retains ownership of the invoices, while factoring involves selling the invoices to a third party, who then takes ownership.
- Collections Process: In accounts receivable financing, your business is responsible for collecting payment from customers. In contrast, factoring companies often take over the collections process, as they now own the invoices.
- Cost of Financing: Factoring typically involves a small fee on each individual invoice once the customer pays and the remaining value of the invoice is funded to your business. In contrast, accounts receivable financing generally involves paying a fee or interest on the outstanding balance of the invoice.
- Speed and Access: Both methods are quicker than traditional business loans, but factoring is often the faster option of the two.
- Amount of Financing: Accounts receivable financing typically provides a pool of funds to borrow against your invoices, while factoring offers a cash advance based on the value of individual invoices.
The choice between factoring and accounts receivable financing depends on your business needs and how you plan to handle the payments process. If you want to retain control of the payments process, accounts receivable financing may be a better choice. If you'd rather hand off payment collection to another company, factoring might be more suitable.
Comparative Table: Factoring vs Accounts Receivable Financing
The main differences between factoring and accounts receivable financing are related to the ownership of the invoices, the payment collections process, and the underwriting criteria. Here is a table summarizing the key differences:
| Factoring | Accounts Receivable Financing |
|---|---|
| The business sells its invoices to the factor, transferring ownership and responsibility for collecting the dues. | The business retains ownership of the invoices and is responsible for collecting the dues. |
| The factor takes on the responsibility for collecting the full invoice amounts from the seller. | The business is responsible for collecting the invoices, with the financing company monitoring the process. |
| Factoring is generally more expensive than accounts receivable financing. | Accounts receivable financing is usually less expensive than factoring. |
| Factoring is willing to approve financing for businesses with a wider range of credit profiles. | Accounts receivable financing has stricter credit requirements, usually approving financing only for customers with good credit profiles. |
Both factoring and accounts receivable financing are forms of receivables finance, which involves using outstanding invoices as collateral to secure financing. However, the differences listed above make them suitable for different business needs and situations.
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