Accounts Receivable Financing vs. Factoring: 5 Key Differences

Small business owner comparing accounts receivable financing and factoring.

If you’re in the business of selling products or services to other businesses, you’re probably all too familiar with the challenge of waiting to get paid. Invoice financing and factoring are two methods that can provide a much-needed cash infusion to help you bridge the gap between when you deliver your product or service and when you receive payment. Both involve using accounts receivable as collateral, but there are some key differences that you should be aware of. 

This article discusses the most important things to know when it comes to accounts receivable financing vs. factoring.

What Is Accounts Receivable Financing?

Accounts receivable financing is a type of short-term business loan that uses your accounts receivable as collateral. Accounts receivable financing is also sometimes called invoice financing or receivables financing.

With this type of loan, you can typically borrow up to 80% of the value of your invoices, and you’ll have to pay a fee for the loan, typically a percentage of the invoice value.

The biggest advantage of accounts receivable financing is that it’s a loan, so you don’t have to give up ownership of your invoices. On the downside, however, loans can be more difficult to qualify for and typically come with higher interest rates.

What Is Invoice Factoring?

Invoice factoring is funding that allows you to sell your accounts receivable (invoices) to a third party at a discount in exchange for immediate cash.

With invoice factoring, you’ll typically receive around 70% to 80% of the invoice value up front and the rest when your customer pays the invoice. Is invoice factoring a loan? No, it isn’t. This means that you don’t have to worry about incurring debt or paying interest on the money you receive.

The biggest advantage of invoice factoring is that it’s a quick and easy way to get funding since there’s no application process or waiting period for approval. Conversely, you’ll have to give up a portion of your invoice value to get the funding. Another potential downside is that invoice factoring can be more expensive than other types of financing, like business loans.

Invoice Financing vs. Factoring: 5 Key Differences

There are a few key ways in which invoice financing and factoring differ:

1. Ownership of Accounts Receivable

One of the key differences between invoice financing and factoring is who actually owns the accounts receivable. With invoice financing, your business retains ownership of the invoice and is responsible for collecting payment from the customer. With factoring, on the other hand, the customer pays the factor directly, and ownership of the invoice is transferred to the factor.

2. Cost of Financing

Another key difference is the cost of financing. With invoice financing, you typically only pay a fee for the service, which is often a percentage of the invoice value. With factoring, you may be charged interest on the outstanding balance of the invoice and a fee for the service.

3. Invoice Amounts

Another difference is the minimum invoice amount that can be financed. With invoice financing, there is often no minimum invoice amount, meaning that even small invoices can be financed. With factoring, on the other hand, there is often a minimum invoice amount, which means that only larger invoices can be financed.

4. Eligibility Requirements

Eligibility requirements for each type of financing also differ in invoice financing vs. factoring. To be eligible for invoice financing, your business must have a good credit history and a strong financial position. To be eligible for factoring, on the other hand, your customers must have good credit histories and be able to pay their invoices on time.

5. Turnaround Time

Finally, another key difference is the turnaround time for each type of financing. With invoice financing, there is often a waiting period for approval, which can take several days or even weeks. With factoring, on the other hand, funding can be obtained much more quickly, often within 24 hours.

So, which is right for your business?

The answer to this question depends on your specific needs and circumstances. Invoice factoring may be the right choice if you need funding quickly and don’t mind paying a higher cost for it. However, invoice financing may be the better choice if you’re looking for a more affordable option and are willing to wait a bit longer for funding.

Need a Fast & Reliable Funding Source for Your Business? Try LendThrive

If you’re a small to medium-sized business owner in need of funding, then you may want to consider LendThrive’s fixed rate business loans. With LendThrive, you can get funding within 24 hours, and there’s no waiting period for approval. Plus, you’ll only pay a fixed rate, so you’ll know exactly how much you need to repay each month. See if you qualify.

Learn more about LendThrive and our business loans, apply now or give us a call today.

Go Back