How Does Accounts Receivable Financing Differ From Factoring?

When running a business, you may come up short on cash flow during some months. You may have enough to get you through a week or two, but with payroll around the corner, you will have to make some serious decisions on how to manage it all. You need access to cash fast to keep everything running smoothly. Accounts receivable financing is one option you have heard about, but it sounds a lot like factoring.

What are the differences between these two forms of cash flow management?

Accounts Receivable Financing Is a Loan

Whenever the word “financing” comes into play, chances are there is a loan of some sort. It is no different in this case. When you need access to money, putting up your outstanding invoices as collateral may help you secure the cash you need to fill the void. This is where accounts receivable financing comes into play. It is a quick, short-term loan that uses the money you should have coming in as security that you will repay the debt.

Factoring Is a Buy-Out

When you look at factoring, it is more of a longer-term solution to cash flow problems. When a company runs on invoicing to pay the bills, there is a lag time between when the product or service is supplied and when it is paid for. You send out invoices, and typically the customer has 30 to 60 days to pay you back. If you can’t afford to wait all that time, factoring provides a longer-term solution to fill the gap. The company will purchase your outstanding invoices outright, giving you a lump-sum cash payment. In exchange, they collect the amount straight from your customers. They make money by shorting the lump-sum payment to you a percentage of the outstanding money.

Accounts Receivable Financing Relies More on Your Credit Worthiness

When applying to get a loan, you need to provide financial information to the creditor. The same happens here when you put your future invoice payments against an advance. The time it takes to qualify you for the funds is far shorter than a traditional business loan, but there is a bit of a waiting period. If you choose to go with a factoring company, they will do some checking into your business finances, but not as heavy as a loan.

Choosing between a short-term fix and a more permanent solution may come into play when coming up with options to get money for your business. Accounts receivable financing is one way you can go to secure the cash you need for your company’s needs.


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