The primary difference between accounts receivable financing and accounts receivable factoring is simply one of “before and after”. That is to say, the former refers to the receipts you have that signify a promise to pay (by the business or consumer with whom you’re doing business), whereas the latter denotes the selling of this receipt to another company – perhaps to increase your liquidity/ immediate cash flow.
Breaking Down the Differences
If you opt to retain the accounts receivable, then it can be employed for the purposes of securing a loan based on the value of the receipts. This is aptly named financing; not factoring. Since the “property” is still in your possession, then it can form the basis of any loan that you intend to request – leaving the option of still additional clout for the determination of creditworthiness (more contributions to the accounts receivable from future business prospects).
On the other hand, as concerns accounts receivable factoring, your accounts receivable is the only product being considered for loan collateral. With this reality, the only real distinctions you have are either a recourse loan or a non-recourse loan. As a result, the factoring method is the more expensive for the business in question, since it is the sole means of collateral and thus the sole consideration for creditworthiness.
Receivables Are Easy to Understand – Difficult to Master
Mastery, for your business, is what will make it possible to consistently choose the best option. At its most basic level, accounts receivable factoring sells your receipts – or better, your ledger – to the lender for an amount of relatively quick cash to help you grow your business. Accounts receivable financing, on the other hand, allows you to keep the invoices that comprise your ledger; the financial institution then loans you money against your ledger – with an interest rate based on the details of the invoices.
Let the experts at Kasher Capital walk you through the details to help you make the best decision for your business. Contact us today.