A comparative analysis of invoice factoring with accounts receivable funding

Factoring can be considered as a business tool for small organizations which provide them with a backhand and relief from the worries of gathering money to keep their work going. There are two basic methods to collect finances for your business. They are: factoring and accounts receivable funding. Though these two terms may sound synonymous but there are differences between them. That is why it is important to know about the gist of the process before opting for factoring services or any other such service.

Usually in a factoring contract, the business can pick and choose about the invoice to be sold to the factor. When you purchase an invoice, the factor manages the receivable until it is paid. The factor essentially becomes the business' defacto credit manager and A/R department by signing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.

Meanwhile, A/R funding is more like a traditional bank loan, but with some key differences. While bank loans may be secured by different kinds of collaterals including plant and equipment, real estate and personal assets of the business owner, A/R financing is backed strictly by a pledge of the business' assets associated with the accounts receivable to the finance company.

In an A/R financing arrangement, the business can borrow money on a borrowing base of 70 percent to 90 percent of the qualified receivables and it is established at each draw. A collateral management fee (typically 1-2 percent) is charged against the outstanding amount and when the money is put forward and the interest is assessed only on the amount of the actual borrowed money.

However, in order to count towards the borrowing base, an invoice must be less than 90 days old and the underlying business must be deemed creditworthy by the finance company. There may also be some other factors which may be taken into account for invoice factoring comparison.

Some basic differences between A/R funding or financing and factoring.

The comparison of A/R funding and factoring is not a simple task. One can be considered as a loan while the other is the sale of the assets or accounts to a third party.

Factoring is more flexible than A/R financing because here the business house can make its own choice regarding the sale of its invoice. A/R financing does not provide this facility with such flexibility. It can serve as an ideal financing option for growing businesses. It has a simple and easy-to-go financing structure which helps the company to follow a step by step order.

On the other hand, A/R financing is less expensive choice. It is less flexible than factoring because here the business house is required to submit all its accounts receivables to the company as collateral.

Both factoring and A/R financing are usually considered to be transitional sources of financing and can carry a business through a time when it does not qualify for traditional bank financing.

After a period of 12-24 months, companies attain a position to repair their financial statements. However, in some industries, companies continue to factor their invoices indefinitely. Trucking is an example of an industry that relies heavily on factoring to keep its cash flowing.

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