The Difference Between Accounts Receivable Financing and Factoring

As companies seek to expand their operations, they find cash flow to be one of the biggest challenges. While they may plenty of assets by which to leverage credit or outstanding accounts which could bring in the needed funds, keeping a low credit risk and optimizing working capital become part of the struggle. Some companies will choose to sell outstanding receivables to a third party for immediate cash, without having to change payments terms or contract arrangements with the consumer. For companies who need funds, there are two options that don’t affect their credit standing or customer-centric service. These are factoring and accounts receivable financing.




Although this is traditional solution to the cash flow problem, this option generally more costly and a bit more difficult to maintain. Through this proves, a third-party lender will assume entire control of the receivable account. It is often done through a wholesale agreement, with a company being required to submit their entire portfolio of debtor accounts and at quite a discount from actual invoice cost. Even though the company will have access to immediate cash, the difference between the initial sale price for the consumer and the amount offered by the lender can be drastic. Some of the overall costs actually exceed more than 30% in annual interest. The original account holder then settles the invoice payments directly with the lender. This option is usually limited to domestic financing, making it difficult for companies who have a global consumer base.


Accounts Receivable Financing


An alternative to factoring, financing with an accounts receivable focus offers attractive rate and payment advance for companies with customers across the globe. In this situation, a third-party lender will offer the company an advance on an outstanding debt, usually between 70 to 90% of the original invoice total. Some companies may even offer an advance of the full total. As with factoring, there is a fee associated with the transaction, but they are often as much as 10 times lower than the fees or cost of a factoring contract. Accounts receivable financing will also allow a company to sell off just a portion of their debt accounts, allowing them to be more selective and conscious of the deal they are actually getting. This is also a more global process, with lenders being as varied as banking institutions or non-bank funders. Final reconciliation is made against payments, minimizing customer involvement.

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