Is Invoice Factoring the Same as AR Financing?

Does your business need financing to grow or improve cash flow? If so, invoice factoring and accounts receivable financing may be options you’re exploring. A tremendous amount of information exists online, but the viewpoints often prove more confusing than helpful. Many financing and factoring companies use the terms factoring and accounts receivable financing interchangeably. In this post, we’ll address the similarities and differences of factoring and accounts receivable financing as we see it. For a quick overview, see the Financing Product Comparison table.

What is Invoice Factoring?

In a previous post, we define invoice factoring as a type of commercial finance that converts outstanding invoices into immediate cash. Factoring serves as a reliable alternative to a line of credit and helps businesses who:

  • Face slow-paying customers
  • Experience seasonality
  • Want to grow and expand
  • Want to launch as a start-up

How Invoice Factoring Works

In factoring, a business sells its invoices to a third party factor. The business can choose which invoices it wants to factor. The business presents a schedule (most often daily or weekly) to the factoring company detailing which invoices to factor. Then, the factoring company immediately advances a pre-determined percentage (typically 70-90%) of that total invoice value into the business’s checking account. Once the debtor pays the invoice under the payment terms, the factoring company pays out the remaining invoice amount less a small administrative fee. Thus, invoice factoring is an ideal financing solution for a business not wanting to wait 30,60 or 90 days for their receivables to roll in.

What is AR Financing?

Accounts receivable (AR) financing also uses outstanding invoices to fund growth.  Like invoice factoring, AR financing serves as another alternative to a traditional line of credit and helps businesses who:

  • Expect steady growth and expansion
  • Experience seasonality
  • May not be in a position for a traditional bank loan, but working towards it

How AR Financing Works

In accounts receivable financing, a business sells all of its invoices to establish a borrowing base. Similar to a traditional line of credit, the receivables line operates as a revolver. So, in AR financing the receivables are pooled.

Similar, Yet Different

Both invoice factoring and AR financing benefit businesses by providing funds in advance of collection. When cash flow timing matters most, both of these financing options quickly put money into the business. In addition, both offer professional credit services and receivables management.

The main difference between invoice factoring and AR financing lies in the underwriting criteria of the deal structures. While factoring offers greater flexibility, AR financing has more strictness around the credit profile. Consequently, AR financing typically offers preferred financing terms.

Answering Your Questions

Here at The Southern Bank, transparency defines our approach. If you’re like most of our customers, getting straight forward answers and understanding the detailed financial implications to your business are key factors in your financing decision. We explain and clarify along the way so you aren’t left wondering what you signed up for. Researching partners and need a question answered? Contact us and get your questions answered today.


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Invoice Factoring | Notice of Assignment

If you’re a business owner considering invoice factoring, the Notice of Assignment (NOA) may cause you some concern. What will my customers think? Why is it necessary? Can we skip sending it? Let’s address these questions to clarify what the NOA covers and put to rest any lingering apprehension.

What is a Notice of Assignment?

The notice of assignment (NOA) informs your customer that a third party (bank, financing company, or factoring company) will manage and collect your accounts receivable (AR) going forward. The NOA arrives in the mail in the format of a letter, as the initial communication notifying your customers of the change in structure and process.

What will my Customers Think?

Tremendous growth in the use of invoice factoring across many industries has made factoring more common than ever. According to the Global Factoring Market 2016-2020 report, analysts expect factoring to grow over 10% annually for the next several years.

Many of our factoring clients work with Fortune 500 companies who simply demand longer payment terms in order to do business. Clients using invoice factoring often show an appetite for accelerating growth and more efficiently managing operations and collections.

In short, you are most likely more concerned about it than your customers. Factoring is a widely used and acceptable means for financing your business.

Why is a Notice of Assignment Important?

In a factoring relationship, a business sells the future collection of accounts receivable (AR) in exchange for cash advances. So, the asset (future AR) belongs to the third party upon completion of the work or delivery of the goods. The business receives the cash advance and the third party waits for payment by the business’s customer.

Due to the intangible nature of AR, the third party provider needs legal language showing ownership of the AR. Thus, the legal language found in the NOA minimizes the risk placed on the third party provider. Third party providers require a NOA. It is critical to the structure of the factoring relationship and protects the third party provider in the event of misdirected payments.

What is Covered in a Notice of Assignment?

The main points covered in a Notice of Assignment include:

  1. Business’s accounts receivable has been assigned and is payable to a third party provider
  2. Updated payment address, typically a lock box
  3. Liability on the customer in the event of misdirected payment

How we’re Different

By working with The Southern Bank, your customers recognize the reliability and stability of your financing partner. Rather than receiving a NOA from an unknown entity or independent financing company, the bank’s reputation as the lender of choice strengthens your customer relationship.


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