A/R Financing Vs. Factoring
Accounts receivable financing is more like a traditional bank loan but with several key differences. While traditional loans may be secured by different collateral, including plants and equipment, real estate, and/or the business owner’s personal assets, accounts receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the financing company.
Under an accounts receivable financing arrangement, a borrowing base of 70 percent to 90 percent of the qualified receivables is established at each draw against which the business can borrow money.
A collateral management fee (typically 1 percent to 2 percent) is charged against the outstanding amount. When money is advanced, interest is assessed only on the amount of money your business actually borrowed.
Typically, an invoice must be less than 90 days old to count toward the borrowing base, and the underlying business must be deemed creditworthy by the financing company. Other conditions may also apply.
As you can see, comparing factoring and accounts receivable financing options is tricky. One is actually a loan, while the other sells an asset (invoices or receivables) to a third party.
However, both A/R financing and factoring have many similarities. Here are the main features of each option to consider before deciding which is the best fit for your company.