What is the difference between factoring and accounts receivable financing?

Weigh your corporate financing options

What is the difference between factoring and accounts receivable financing?

As 2020 approaches the end, business owners have considerable concerns about cash flow. Nearly 60% of business owners stated that they have been negatively or very negatively affected due to the recent economic impact of COVID-19 Small business pollsAlthough trivial expenses and bulk purchases are certainly on the cutting board, many companies are also checking their accounts receivable.They are considering Invoice factoring And invoice financing to increase the company’s cash flow-sooner rather than later. What is accounts receivable and how can account receivable factoring help your cash flow? These are important issues, and financial factors need to be considered before deciding to adopt these financing channels. This is something to know.

What is accounts receivable financing?

Also known as “invoice financing”, accounts receivable financing prepays your business funds based on the value of unpaid invoices. Accounts receivable are counted as assets, and their value is equal to the outstanding balance of the invoice (customers who have been billed but not yet paid). As with commercial loans, unpaid invoices are collateral used by mortgage financing companies to determine how much money is “lent” to your company. The financial company will prepay you up to 100% of the invoice (or invoice) value and charge a fee based on the invoice value every week until the financing invoice is paid in full. Some finance companies also provide selective accounts receivable financing. In this option, the borrower can choose which accounts receivable to pay in advance to pay in advance.

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Although accounts receivable financing is sometimes confused with factoring, Important differenceThe most significant difference is how to handle the collection of invoices. With accounts receivable invoicing, you can maintain ownership and control of the accounts receivable. You still communicate with customers and collect payments. Your customers will never know that you have a loan on their invoice. This may not seem like a big deal, but if your customers find that you are selling invoices for cash, they may think that your business is in trouble, which may affect future business transactions.

Before signing a contract with an accounts receivable financing company, it is important to understand the cost and duration of the financing contract. Fund box Provide accounts receivable financing for the 12-week repayment plan at a reasonable interest rate of 4.66%. There is no minimum amount to be approved, and the weekly payments to Fundbox include small fees. If you want to pay off the contract early, you will not be penalized.

What is factoring and how does it work?

Like accounts receivable financing, Invoice factoring Prepay your business funds based on the amount of unpaid invoices. However, for factoring business, you sell the outstanding invoices to a factoring company (“Factor”), and the factoring company collects invoice payments directly from your customers. Unlike accounts receivable financing, your company will not receive 100% of the invoice amount.

Generally, through invoice factoring, companies receive approximately 80% of the invoice value. After the factoring company receives the entire invoice amount, the company receives the balance minus the factoring fee. Factoring fees may be very high, and may include a certain percentage of the invoice value plus service fees, origination fees, credit check fees, etc.

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As we mentioned before, since factoring companies now control the collection of unpaid invoices, they will inform your customers of the transaction and how to pay the invoices. This notification may alert your customers to your cash flow issues and may damage your company’s reputation. On the other hand, you may wish to transfer the responsibility for collection to another company.

Since the factoring company now controls your invoices, you may find that this factor has too much influence on which customers you can do business with in the future. If the customer defaults or payment is slow, this factor may terminate the relationship. In addition, this factor may require a long-term contract with your business, which means you can give up control of invoices for a longer period of time than you wish.

The right choice

Accounts receivable financing and factoring are good alternatives to bank loans, suitable for small businesses that need to inject cash quickly and cannot wait for lengthy approvals. However, there are considerable differences between the two. Make sure you weigh the advantages and disadvantages of these types of financing.

If time is your biggest concern, factoring usually takes longer than the financing of accounts receivable. Fundbox allows your business to choose the number of invoices you want to finance. Depending on your bank, you may see the funds in your business account in just one day.

Register your Fundbox account now!

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