Accounts Receivable (AR) Financing and AR Factoring are two financial solutions utilized by businesses to improve cash flow by leveraging their accounts receivable. While both involve the selling of invoices for instant cash, they operate differently. AR Financing, also known as invoice financing, is more of a loan where a percentage of the invoice value is advanced, and the business retains control of its receivables. On the other hand, AR Factoring involves selling invoices to a factoring company.
Understanding Accounts Receivable Financing
Accounts Receivable Financing, commonly referred to as invoice financing, is a financial solution where businesses use their outstanding invoices as collateral to gain immediate liquidity. In this model, a financial institution, typically a bank or specialized financing company, provides an advance that covers a substantial portion (often up to 85% – 90%) of the value of the outstanding invoices. The remaining balance, minus the financier’s fee, is given once the customer pays the invoice. This mechanism provides businesses with instant cash flow, enabling them to meet expenses and invest in growth without waiting for their customers to pay their invoices.
Examining Invoice Factoring
Invoice factoring, often just referred to as ‘factoring’, is another mechanism used by businesses to improve cash flow. In this approach, a business sells its outstanding invoices to a factoring company at a discounted rate. The factoring company then collects the full amount directly from the customers. This essentially transfers the responsibility of collecting payments from the business to the factoring company. It provides businesses with immediate cash, eliminating the need to wait for customers to settle their invoices. However, it’s worth noting that the business would receive less than the full invoice amount due to the discount factored in by the factoring company.
The Key Differences Between Financing and Factoring
The main differences between AR financing and Invoice Factoring lie in the control over receivables and the collection process. In AR Financing, the business retains control over its invoices, and the financier does not interact directly with the customers. The collection responsibility remains with the business. Conversely, in invoice factoring, the factoring company purchases the invoices and thus take part in assisting the business with collection process, and directly interacting with the customers. While both methods provide immediate cash flow, Invoice Factoring can potentially impact customer relationships as the factoring company will be part of the invoice collection process.
New Century Financial offers comprehensive invoice factoring services nationwide. Unlike other invoice factoring companies, we do not lock customers into long-term contracts, nor are there any hidden fees. We also give businesses more control, so they can choose which invoices or parts of invoices get factored. If you are tired of having a backlog of unpaid receivables and want funds within 24 hours, contact New Century Financial today.