Accounts Receivable Factoring

By: Peter Emerson

Accounts Receivable Financing and Accounts Receivable Factoring are two terms that are intermittently used, but there is a major difference between them. Although both refer to the concept of extending cash to an owner of a business in lieu of invoices and other Accounts Receivable, there are differences between the two, no matter how subtle.

First of all, Accounts Receivable Financing is a loan in which the invoices are used as collateral. But this not the case with Accounts Receivable Factoring. Accounts Receivable Factoring is not a loan. It involves the selling of the invoices to the Financing company at a rate less than the face value of the invoices. The Financing companies then collect the money at the full face value from the clients. This means the business house no longer has the responsibility of collecting the money.

But this is not the case in Accounts Receivable Financing. The process of Financing involves the extension of an advance on the percentage of each invoiceï?bf?s amount. Also, the responsibility of collecting the money remains with the business house.

Both Accounts Receivable Funding and Financing companies charge additional fees for services rendered, but in case of Accounts Receivable Factoring, the fees charged are comparatively higher. This is mainly because the entire responsibility of collecting the money is with the Financing company.

Companies providing Accounts Receivable Financing step in and work with companies who cannot get loans otherwise. Accounts Receivable Factoring, on the other hand, proves useful to business houses urgently in need of ready cash flow.

That said, both Accounts Receivable Factoring and Financing prove extremely convenient to companies who urgently require a cash flow to keep their business going.

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