If you manage a business, you know that obtaining business financing can be overwhelming. In addition to traditional sources of funding, such as bank loans, alternative sources of financing have become very popular. One question we hear on a daily basis at National Business Capital is, “what is the difference between factoring and accounts receivable financing?” So here is a short answer which addresses some of the main differences.
Factoring can help a business in need of cash flow by selling an invoice to a third party, or factor, for a discount. The factor will typically pay 75 – 85 percent of the receivable up front and the balance (minus the discount) upon payment. The responsibility of collecting the receivable falls upon the factor. In fact, the factor will run a credit check on the customer who owes the payment and deal directly with them for collections. This can potentially damage business relations between the business and their customer. Factoring usually comes at a greater cost than accounts receivable financing due to the greater risk and work involved on the part of the factor.
Accounts Receivable Financing is another alternative to traditional business financing. In this scenario, funding is based upon a company’s accounts receivables as a whole, not attached to one particular invoice. Collections remain the responsibility of the business and the business is responsible for any bad debt on the receivables pledged as collateral on the loan. Because there is less risk to the funding source, this option is typically a less expensive option than factoring.
Of course, there are many things to consider when deciding which form of business financing is best for you. The knowledgeable business consultants at National Business Capital can answer you questions and help navigate you to the best solution. Give us a call today!