Sometimes your organization needs financing to take advantage of opportunities, move to the next step in your strategy or to bridge gaps that occur when clients have outstanding debts. When that happens, you may be able to leverage your receivables to get financing through factoring financing or accounts receivable financing. Though some use these terms interchangeably, they are different processes.
In factoring financing, the receivable is sold to the financing organization in exchange for the loan. The receivable is no longer owned by your organization and it is the responsibility of the factor to collect any money owed on the receivable. However, since the factor has the receivable as the payment for the loan, this can be a more expensive option for financing. After all, there is no guarantee that the factor will get payment on the invoices once they are purchased.
Accounts Receivable Financing
In accounts receivable financing, your receivable is considered collateral for your financing. In this structure, the amount loaned often depends on the receivables being used as collateral. This includes the amount owed, the time it has been waiting to be paid, and other related factors. This helps the factor determine the likelihood that you will receive the payment, which determines the factor’s likelihood of getting repaid for the loan. Most often, the loan is a percentage of what is remaining on the receivable. In addition, you may be able to roll financing forward if you do not use it in a given month.
Whether you want to sell your receivables to get financing or use them as collateral, the money you expect from clients can be a way to work with financial institutions to get the capital you need for your business. Through factoring financing or accounts receivable financing, you can be assured that you will not have to wait for clients to pay their invoices in order to achieve your company’s goals and objectives.