Accounts receivable financing and factoring are two relatively new financial products which have emerged in the last couple of decades to help fill the gap left by fewer approvals from traditional lenders. While both are considered forms of alternative lending, there are some fairly significant differences between the two.
Accounts Receivable financing
This form of financing is very much like a secured loan, in that it uses a company’s assets as collateral. The assets, in this case, are the company’s accounts receivable, which in effect represent incoming revenue yet to be realized. Assuming that a company’s accounts receivable meet the standards of eligibility for a financing company, an amount somewhere between 70% and 90% of the invoices’ face value will be provided to the company, and a fee between 1% and 2% will be charged.
The accounts receivable are not actually sold in this transaction but are merely serving as collateral. That means the company will still be obliged to collect the amounts from customers, just as it always has. In this sense, accounts receivable financing can be considered something like a line of credit, since a company can draw on it, based on the value attached to its accounts receivable. When an outstanding line of credit has been repaid, the company can then begin a brand-new draw on a new batch of accounts receivable.
Invoice factoring is a slightly different process than accounts receivable financing is. In this situation, a factor actually buys your accounts receivable for somewhere between 70% and 90% of their actual face value. The factoring company then assumes ownership of those accounts receivable and must collect the amounts from customers. The factoring company will typically charge a fee somewhere between 1% and 3% of the value of the invoices. In this scenario, the company selling its invoices is then relieved of the responsibility of collecting on those invoices, and the factoring company takes on the responsibility.
Are you considering A/R financing or factoring?
One of these business approaches may be a great way for your company to generate cash which can be used for daily operations or business growth. Contact us at Purevue Capital, so our financial specialists can discuss some options in this area with you.