Understanding Accounts Receivable Financing vs Factoring

82% of small businesses fail due to cash flow problems, according to U.S. Bank data. One way to solve this issue is by using your receivables to unlock working capital.

Two common approaches are accounts receivable financing vs factoring, but they work in different ways and suit different situations. Today we're taking a closer look into how these two funding methods differ, how each one affects your operations, and more!

What Is Accounts Receivable Financing?

Accounts receivable financing is a way for businesses to get money by using their unpaid invoices. There are three primary parts to how accounts receivable financing works:

• The Business Uses Unpaid Invoices as Collateral
• The Lender Advances a Percentage of the Invoice Value
• The Business Remains Responsible for Collections

The Business Uses Unpaid Invoices as Collateral

In this setup, a business uses its unpaid customer invoices to secure a loan or line of credit. The invoices act as a promise that money is coming in.

Lenders feel more confident lending money when they know the business has accounts receivable in place. This makes it a popular option among small and mid-sized businesses that have strong sales but delayed payments.

The Lender Advances a Percentage of the Invoice Value

The lender reviews the invoice value and then gives the business a percentage of that amount up front. This is usually around 70 to 90 percent.

Once the customer pays the invoice in full, the lender gives the business the remaining balance, minus fees and interest. These fees vary depending on the lender and the risk involved.

The Business Remains Responsible for Collections

One of the most important parts of accounts receivable financing is that the business keeps control of customer interactions. It's still the company's job to collect payment from its customers. This allows the business to maintain its customer relationships and reputation while still improving cash flow.

Invoice Factoring Benefits

Invoice factoring is another way businesses can get cash quickly by using unpaid invoices. There are three main parts to how invoice factoring works:

• The Business Sells Its Invoices to a Factoring Company
• The Factoring Company Pays a Large Portion Up Front
• The Factor Collects Directly From Customers

The Business Sells Its Invoices to a Factoring Company

With invoice factoring, a company sells its unpaid invoices to a third-party company called a factor. This is a sale, not a loan.

The business no longer owns the invoices once they are sold. This approach is common among businesses that need fast access to cash and may not qualify for more traditional loans.

The Factoring Company Pays a Large Portion Up Front

After reviewing the invoices, the factor pays the business most of the invoice value. This is usually a large percentage, often between 70 and 90 percent.

The final payment comes after the factor receives the full amount from the customer. The factor keeps a fee, which varies based on risk and how long it takes to collect.

The Factor Collects Directly from Customers

Once the invoices are sold, the factor takes over the job of contacting and collecting payment from the business's customers. This can save time for the business but may affect the customer relationship.

Some clients may notice the change and react to it, depending on how the factor handles communication. Businesses that are less concerned with customer contact often find this process easier.

Key Differences: Accounts Receivable Financing vs Factoring

With accounts receivable financing, the business keeps ownership of the invoices. The invoices are used as collateral, but they aren't sold.

With factoring, the business gives up ownership. The factor now controls those invoices and collects the payments.

In accounts receivable financing, the business still handles customer payments. This keeps everything internal and gives the company full control.

With factoring, the factor reaches out to the customers. They manage the collections directly, which removes that task from the business.

Financing companies often look at the business's credit and payment history. Factoring companies usually care more about the customers' credit because they're the ones making the payments. That's one reason why factoring can work better for newer companies or businesses with limited credit history.

How Each Affects Customer Relationships

One of the biggest differences is customer contact. Accounts receivable financing keeps that process in-house.

This helps preserve the business relationship. Factoring, on the other hand, changes who your customers hear from. Some clients may not mind, but others may prefer dealing with your team directly.

When Should You Use Accounts Receivable Financing?

Some companies don't want anyone else speaking to their customers. If you prefer to manage those relationships yourself, accounts receivable financing lets you do that. You still collect payments, which helps protect your company's image and customer service style.

Lenders offering this type of financing usually care about how your clients pay their bills. If your customer base is reliable and consistent, you'll likely qualify for better terms and lower fees.

This option gives you access to funds while still holding onto your receivables. It can be helpful for seasonal businesses or companies that need to cover short-term gaps.

When Is Factoring a Better Fit?

Factoring companies often look at your customers' credit rather than your own. That makes it easier for new businesses or those with weaker credit to get approved. As long as your clients pay reliably, factoring can still work well.

Some businesses run into gaps between sending invoices and receiving payment. Factoring gives you fast access to most of that money upfront. This helps cover payroll, supplies, or daily expenses.

If your business is short on staff or time, factoring takes the pressure off. The factoring company deals with your customers, so you can focus on running your business.

Business Financing Options and Cash Flow Management

Choosing between accounts receivable financing vs factoring depends on how your business handles cash flow, credit, and customer relationships.

At Riverpoint Capital, we focus on long-term relationships, not quick wins. While others chase short-term profits, we invest in your future. We're here to grow with you, offering steady, reliable funding year after year. Our goal is to be your trusted financial partner for decades, not just one deal.

Get in touch today to find out how we can help with your financial future!

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