There is a wide range of options to secure financing for your organization. Along with traditional loans and investors, accounts receivable and factoring financing are two opportunities you can consider for getting the financing you need. Knowing the difference between the two can help you decide which path is the right one for your organization.
What is accounts receivable financing?
Accounts receivable financing can be considered to be a loan for your organization. The process for approval is similar to asset-based loans, with the amount available depending on the value of the asset. In this situation, unpaid invoices can be used as an asset. As customers pay invoices, the money from the invoices can be used to pay down the amount borrowed. This is an effective process for organizations with good credit. However, it is important to note that, since you retain the invoices, your organization is responsible for getting payment from customers in order to meet your repayment schedule.
What is factoring financing?
Factoring financing is different from accounts receivable financing. Rather than using invoices as collateral, this type of financing sells your invoices to a third-party, who is then responsible for collecting from customers. Because the factoring company purchases your invoices and collects the unpaid debt, there is no money for your organization to pay back. Rather, whatever money is collected on the invoices is how the factoring company is repaid for the money given to your organization. This is beneficial because it puts the risk on the factoring company if there is a likelihood that customers will not pay their invoices.
Using accounts receivable financing or factoring financing can be a good way to get financing for your organization using the assets of unpaid invoices as a way to repay or secure the financing. By selecting the right option for your organization, you can get your financing and continue working toward your organizational objectives successfully.