Accounts receivable financing and factoring are just two options you have when it comes to securing funds for your business. It’s important to understand the difference between them so you can make the right choice for your financial needs.

What Is Invoice Factoring?

When you factor an invoice, it means that you sell the face value of an unpaid bill to a third-party organization. That company forwards you the value of your receivable less its fee. It may also hold back a portion of the invoice, known as an escrow until it receives full payment from your customer. The factoring company then owns the invoice and your customer makes payment to it instead of your business.

Agreements vary, but you may be off the hook for collection activities if your customer doesn’t pay on time. However, the factor would be unlikely to allow you to sell the same customer’s invoices in the future.

What Is Accounts Receivable Financing?

Compared to factoring, accounts receivable financing operates more like a business loan from a bank with a few major differences. With a bank loan, you typically need to pledge a major asset such as a real estate holding, equipment, or personal assets as a business owner.

When you opt for accounts receivable financing, you pledge business assets tied to your accounts receivable. The lender establishes a borrowing base between 70 and 90 percent. This becomes the draw at which the borrower can obtain funds in the future. Lenders typically charge a collateral management fee of up to two percent as well. You only pay interest on the money advanced to you with each draw against your accounts receivable financing account. Invoices used for qualification generally need to be less than 90 days old.

Ready to Explore Your Business Financing Options?

Commercial Capital Funding offers to factor, accounts receivable financing, and more to help your business maintain positive cash flow. Please schedule an appointment today to learn more.