In many cases, factoring and accounts receivable financing are used interchangeably by businessmen, even though there is a distinct difference between the two. Probably one of the biggest differences between the two is that with factoring, the receivable has been sold to the factor, which means it is an actual sale of a financial asset. As an example, when you sell invoices to a factor at some agreed-upon price, that constitutes the sale of one of your financial assets, which means it is not a loan, and there is no amount of money that needs to be repaid.
Difference between A/R financing and factoring
Accounts receivable financing is a bit different, because your receivables are actually used as collateral for a loan. In this case, there is a loan involved, and you never actually relinquish ownership of your receivables. They are merely serving as collateral in the event that you should default on the loan, in which case they would probably be seized by the alternative lender.
This is actually a fairly significant difference, because once you sell receivables to a factor, they are effectively removed from accounts receivable, and you will receive cash in exchange for them. In accounts receivable financing, you would retain the receivables, and you would also receive an amount of cash which could be used for any business purpose. This loan would then have to be repaid in some way, most likely through monthly payments, until the balance was completely paid off.
Another difference worth noting between these two business transactions, is that factoring tends to be more expensive, since the receivable is the only object a factor has in the transaction. With A/R financing, and alternative lender would have both the loan document and the receivables themselves as collateral. That makes A/R financing a much less risky proposition for any lender, and the one that is more operationally beneficial.
Is your business interested in factoring?
There are some considerable benefits available through factoring, and if you’re interested in considering it, we’d be happy to discuss it with you. Contact us at First Source Capital so we can consider some options with you.