factoring vs accounts receivable financing

In this option, the borrower can choose which receivables to advance for early payment. Selective receivables finance is an alternative form of factoring that offers all the benefits of traditional factoring with more competitive pricing and flexibility – without heavy involvement from the factor. It allows companies to sell their accounts receivable with their largest, most creditworthy customers for immediate payment.

factoring vs accounts receivable financing

Factoring allows a business to do what they do best and that is provide the quality product or service that they have developed. So long as there is profit margin in the billed invoice amount to cover the factoring fee then it is a logical, simple, effective and fast way to expedite cash flow.

Accounts Receivable Financing vs Factoring

This is the fundamental difference between it and accounts receivable financing. New demand for liquidity is driving greater curiosity around accounts receivable finance. Accounts receivable finance unlocks working capital accounts receivable factoring by allowing companies to sell their customer invoices to banks and other funding sources for faster payment. In turn, companies improve cash flow and minimize the need to turn to more expensive sources of liquidity.

For completeness sake, please note however that in very specific cases, the Belgian tax authorities and Belgian Courts have taken the position that a payment delay in reality qualifies as a concealed loan . The two terms are similar in that factoring companies assume the risk of customers paying late or not paying at all. For this reason, factoring companies review the credit history and other financials of your customers before purchasing the invoice. If the credit history is good, they will be more confident in making the agreement. For example, invoice factoring or account receivable financing are both excellent solutions to resolving poor cash flow. In this blog post, we’ll explain the similarities and differences between the two so you can understand what option is better for your small business. The biggest advantage of accounts receivable financing is that it’s a loan, so you don’t have to give up ownership of your invoices.

Yardstick Management Case Study

You agreed to pay 2% per month and your customer took two months to pay, making your fees 4% of the value of the invoice. After your customer’s payment, the factoring company will pay you the remaining 6% of the value of the invoice. Sometimes using accounts receivable financing is all that stands between your small business and bankruptcy, particularly during a recession or other types of tough times for your business. Don’t hesitate to use it for your working capital needs if you need to. It may not be acceptable financing, however, for longer-term business financing needs.

  • However, this type of financing, which isn’t usually offered with invoice discounting, is typically a more expensive option.
  • This may be a possible solution; however, there may be an easier way and that is to “obtain factoring”.
  • Collections and disbursements are uneven – like temporary staffing agencies, where employees are paid bi-weekly by the agency but its invoices may only be settled by the employer monthly .
  • While you do get access to your money sooner, it comes at a cost to your capital.
  • Using factoring means your customers will be working with a different company.

Be the first to know about new B2B SaaS Marketing insights to build or refine your marketing function with the tools and knowledge of today’s industry. Let’s say you are Company XYZ. You send a $10,000 invoice to Blank University for an order of school-themed apparel. The invoice is Net 60, therefore Blank University does not have to pay the $10,000 invoice for another two months. As a small business owner, you’ve started a journey to support yourself by doing something you love and are passionate about. But, unfortunately, following your dreams doesn’t guarantee a steady stream of revenue.