When your company requires funding but doesn’t qualify for a traditional bank loan, there are still several options available to you. Two of these alternative financing possibilities are factoring and accounts receivable financing. Here is a comparison between them so that you can decide which is right for your business.
Basics of Factoring
Factoring involves selling your unpaid accounts receivables to a financing company known as a factor. You then receive 70 to 95 percent of the value of the invoices. The factor takes over the collection process, and once it has obtained payments from your customers, you receive the balance of the value of the accounts receivables minus a factoring fee.
Basics of Accounts Receivable Financing
When you use accounts receivable financing, you obtain a secured loan using the accounts receivables as collateral. The loan is typically from 70 to 95 percent of their value. You continue to manage payments from customers. Accounts receivable financing is similar to a line of credit in that you can continue to draw loans based on your accounts receivables without a new application process each time.
Differences Between Factoring and Accounts Receivable Financing
Factoring and accounts receivable financing are similar in that both forms of funding have to do with the value of your unpaid invoices. In both situations you receive an advance of invoice payments and must pay a financing fee. However, factoring involves selling your invoices to a factoring company, which then takes over the collection process. This can be disruptive to your customers when they have to handle payments with the factor instead of you. On the other hand, with accounts receivable financing you continue to handle collections, which allows more continuity for your customers.
The Best Option for Your Business
Either factoring or accounts receivable financing can be helpful when you need funding to cover orders from new customers. Although factoring is more disruptive to your clients, it has the advantage of freeing you from spending time on the collection process so that you can focus on company growth. When you are making your decision, consider which option provides you with the greatest value for the lowest fees.
For more advice on accounts receivable financing and factoring, contact Star Capital USA.