Factoring vs. Accounts Receivable Financing: Which Option is Right for Your Business?

Factoring vs. Accounts Receivable Financing: Which Option is Right for Your Business?

When you cannot secure capital from traditional bank loans or ordinary financing options like crowdfunding, do not give up. You can look into alternatives and ensure your business does not stagnate. Factoring and accounts receivable financing are some of the options you can look into. In addition, qualifying for them is easy.

Factoring vs. Accounts Receivable Financing

Factoring is the process where a company referred to as a ‘factor’ buys the business’s accounts receivable for a certain percentage. The factor then takes the responsibility of collecting payment from clients. You will also be charged a service fee. On the other hand, accounts receivable financing is where the business takes a loan, but instead of using tangible assets like property as collateral, the lender uses the business’s accounts receivable. The company will continue receiving payments from customers.

Major Difference Between the Two

With accounts receivable financing, your customers will not be affected. You will still collect payment from them to pay the loan. Therefore, customers do not have to know about your loan unless you tell them.  Factoring, on the other hand, means the lender takes charge of collecting payments from customers.

Who Needs Factoring or Accounts Receivable

Take a situation where your company is growing, and you are getting new customers. With the growing demand, you need to increase supply. However, you do not have enough cash to restock your shop. This is where factoring and account receivable financing come in, allowing you to fulfill those orders. Selling unpaid invoices to the financing company enables you to get capital to keep meeting demand.

Choosing the Right option For Your Business

While there are several factors to consider before choosing either, it also could be a matter of what you qualify for. If you have both options, going with factoring can be disruptive. This is because you are no longer in charge of collecting payment. To some companies, this may feel like a blessing as they do not want to chase customers asking for payment.

Whether you choose factoring or accounts receivable financing, both can help you meet customer demands instead of sending them away. If you are looking for financing, reach out to Masters Commercial Capital Group for financial assistance to help meet the growing needs of your business.