Accounts Receivable Financing

Is Invoice Factoring the Same as AR Financing?

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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.

< Back to the Factoring Guide

Invoice Factoring | Notice of Assignment

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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.

< Back to the Factoring Guide

Accounts Receivable Financing Buyer’s Guide

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If you are like most small business owners, securing financing often involves emotions ranging from uncertainty to frustration as you navigate the alternatives. In addition to your daily job responsibilities, the demands of evaluating borrowing options can be stressful and overwhelming. This straightforward buyer’s guide serves as a starting point to help you with the decision making process around choosing an accounts receivable financing partner.

What is Accounts Receivable Financing?

A/R financing allows a business to receive cash in advance of the payments due from its customers on open invoices. Rather than waiting 30, 60 or 90 days to be paid, the business can present open A/R to its financing partner and receive money within hours. By utilizing Accounts Receivable financing, businesses can accelerate their cash flow helping them make payroll, purchase new inventory, take on new contracts, and generally grow more sustainably.

Accounts Receivable financing is a term that is often used interchangeably with invoice discounting, factoring, and even asset based lending in some instances. With each lender using different terminology and different practices, selecting an A/R financing provider can be confusing. This guide will help you ask the right questions and select the best A/R financing solution for your business.

If you’re interested in learning more about the different types of lenders take a look at Exploring Your Options for Business Financing.

12 Questions to Ask an A/R Financing Partner

  1. How is my credit line established?

    Desired Answer: In A/R financing, your credit limit should be based on the credit strength of your customer and your business’s projected revenue.
    Red Flags: Traditional underwriting criteria like operating history, profitability, ratios, etc. don’t allow your business to benefit from the flexibility of A/R financing.

  2. Where do you get your funds?

    Desired Answer: The financier has a direct source of funds and lends those funds to you (banks or established financiers lending their funds to you).
    Red Flags: The financier borrows money making them a middleman. Whether they’re borrowing from a bank or private investors these costs are passed on to you. Even worse, the availability of these funds is not guaranteed.

  3. How quickly is my funding available?

    Desired Answer: A best in class A/R financing provider will ensure funds are in your account 12 – 24 hours after you’ve financed your receivables.
    Red Flags: Two to three days. If you’re funding with an independent financing company as opposed to a bank, these funds can take longer to clear. Don’t forget, any wire fees will be passed on to you, so ask about ACH fund transmission.

  4. How quickly are payments from my customers applied to my balance?

    Desired Answer: Immediately upon receipt.
    Red Flags: Any clearance days cost you time and money. Again, funding with a bank or with a provider that has a close relationship with a bank reduces holding periods and interest.

  5. What are all the fees associated with your financing?

    Desired Answer: Interest and/or discount fees only. The more straightforward the pricing structure, the more predictable the financing costs and cash flows.
    Red Flags: Any additional transaction fees, ACH fees, lockbox fees, service fees should be red flags. Origination fees and termination fees can sometimes be negotiated.

  6. What’s the term on your typical contract?

    Desired Answer: One year or less. If the financier requires a two-year commitment, keep looking.
    Red Flags: Two years or more. Flexibility is the name of the game. Don’t lock yourself in needlessly.

  7. How long has the financing company been in business?

    Desired Answer: While the length of time a financing company has been in business is not always a barometer for quality, it’s important to find a financier that has a proven and stable operating history.
    Red Flags: Start Ups. There are few barriers to entry for accounts receivable financing providers which unfortunately means a number of under-qualified partners. You don’t want your financing partner to go out of business and put you out of business in the process.

  8. What are your funding or lending limits?

    Desired Answer: Whether it’s one hundred thousand dollars or one hundred million dollars, all financing companies have a limit. If your company grows past that limit, there is likely a contingency plan, but at this point you simply want the financing company to be open and honest with you.
    Red Flags: “We don’t have a limit. We can do it all.” This is simply untrue. Everyone has a limit and you should push on sales people that try and state otherwise

  9. What are your funding limits for each company’s customer?

    Desired Answer: Similar to the answer above, you want your funding provider to outline how credit limits are established for your business’s clients.
    Red Flags: Ambiguity. Are they unclear? Is there no process in place? If so, ask to speak with their underwriter or the person making credit decisions.

  10. How will you interact with my customers?

    Desired Answer: In A/R financing relationships, there is interaction between the financier and the company’s customer at some level. Clarity, justification, and confidence in a funding provider’s process is crucial.
    Red Flags: Heavy handed responses and unclear responses are equally troublesome. If the financier is avoiding the question or claims there is no interaction, watch out. Similarly, good financiers understand it’s a partnership and not an adversarial relationship.

  11. Is any part of your operations outsourced to third parties?

    Desired Answer: No. Everything from sales, to credit, to accounts receivable management is in house.
    Red Flags: Yes. Some funding providers, may utilize lending “platforms” that are really a third party servicer (i.e. BusinessManager). Ideally, most companies prefer to work with full-service shops rather than those that may outsource crucial practices and processes.

  12. What reporting will I have access to?

    Desired Answer: Direct access to your account statements and open invoices via an online platform is a must.
    Red Flags: Reports are provided on demand and as needed. This leaves the financing party in a position of power and more often than not leaves customers in the dark.