5 Factoring And Receivables Financing Differences To Consider

While many businesses use accounts receivables financing as an alternative lending option to traditional bank loans, many others use factoring. With this being said, newer business owners looking to obtain working capital quickly struggle to determine which option is best. As a business owner in this situation, there are multiple factors that you need to consider in order to make a well-informed decision. Continue reading to learn about the main factoring and receivables financing differences to consider when making this decision.


The most prominent difference between factoring and receivables financing is ownership. Business owners to take the accounts receivables route have to assign their invoices as collateral. In return, they receive loans. Because accounts receivables involves getting a loan and paying it off to maintain ownership of your invoices, you put your credit score at risk. In contrast, factors purchase companies’ invoices. Therefore, businesses that choose factoring lose ownership of their invoices entirely. Moreover, they sell them to factors at a lower rate. Keep the ownership differences in mind when deciding between factoring and account receivables.


Moreover, the requirements vary between these two popular options. Since receivables financing is a type of lending, you need excellent business credit. Lenders favor companies who have great credit histories. After all, the ones with good credit are usually also the ones to repay their loans in full and on time. If you do not have credit, but still want to take advantage of this quick cash option, work to improve your credit score. On the other hand, you can take advantage of factoring, which does not hold applicants up to such high standards. Typically, factors do not consider companies’ credit scores. Determine which requirements you can meet to assist you in making your receivables financing vs factoring decision.


Accounts receivables and factoring both offer different levels of flexibility as well. Factoring usually offers more flexibility to businesses. When companies choose factoring over its counterpart, they gain the ability to select the invoices that they want to sell. In contrast, receivables financing requires businesses to submit every accounts receivable as collateral. Therefore, factoring offers more flexibility than its counter part, making it a great option for business owners looking to keep certain accounts for themselves. This is a significant difference between the two options for such business owners.


Furthermore, the costs range between receivables financing and factoring. As a business owner, you are always trying to minimize your expenses and maximize your profits. Therefore, you need to examine your financial status to determine which option will enable you to keep your costs low and your profits high. Most business owners opt for receivables financing because it is less costly than factoring. More so, factoring usually does not advance on many sold invoices. Take a look at your business finances and understand that an accounts receivable option is less expensive. By acknowledging this difference, you will make a well-informed decision between accounts receivables and factoring.

Funding Sources

In addition to the above differences between invoice factoring and account receivables, the allowed funding sources differ. Receivables financing differs from an array of other fast options int he way that it enables business owners to use multiple funders. When you use more than one funder in a single program, you minimize your risks. You do not have to depend on one financial institution. Instead, you can rely on multiple institutions and set yourself up for success. Do not overlook this major difference between factoring and receivables financing.

If you want to obtain working capital fast, you are likely considering receivables financing and factoring. One of the main differences is the ownership because receivables financing is essentially a form of lending. The requirements to obtain each type of financing differs as well. Factoring offers more flexibility, but is often costly. Finally, accounts receivables financing allows business owners to use multiple funders.
Consider these main factoring and receivables financing differences before making a decision.

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