Invoice-based businesses have a set of unique resources for cash management and capital raising, but choosing between them means understanding some subtle nuances in the way they are structured. For manufacturing businesses, this means weighing options like financing invoices or purchase orders. For other companies, it is often whether to use accounts receivable financing or factoring to get capital from those invoices.

Benefits of AR Financing

Financing your accounts can be less expensive, but it does not mean you can write them off as collected. You do outsource the collection of repayment to a financing company, which outsources some administrative labor to offset the cost. When the financing company reports on the completed payment, you then need to account for the invoice being fulfilled. That also means you need to track which customers are costing you money with extra fees by paying late, although you will find out from the financing company, tracking is easy.

In the end, accounts receivable financing often results in a two-round payment structure. When customers pay on time, the advance is covered with the financing fees, and there is a little leftover that you receive at the end of the process. This can be an organizational advantage, allowing you to absorb the costs of the fees in your quote to the customer while receiving a first-round payment for working capital and a second round you can earmark as profits or reserve savings.

Advantages of Factoring

The biggest difference between factoring and financing accounts? Factoring does let you be done with the invoice. You are essentially selling the right to collect on that debt to a third party, so instead of having financing costs as a cost of business, you can record it as accepting less than face value for the invoice and moving on. This means when you outsource the collection work, you have the opportunity to totally outsource your receivables process.

If you make a habit of factoring regularly, you basically get to choose when you get paid, but selling the right to collect means accepting less than the face value because those administrative expenses get passed on. Factoring costs are very predictable, though, so you might be able to adjust costs to customers to absorb them. In some cases, they could even offset the productivity lost by doing your own collections and allowing you to make more money. That’s a huge advantage for small companies and freelance professionals.