Last Updated June 11, 2025
Does your business need financing to expand or improve cash flow? If so, invoice factoring and accounts receivable financing are options worth exploring.
A tremendous amount of information exists about these two financing solutions, but after researching, you might be left feeling confused. Many sources use the terms factoring and accounts receivable (AR) financing interchangeably, or you might find different definitions from different sources. The goal of this piece is to provide clarity regarding A/R financing vs. factoring by explaining how each solution works, discussing similarities and differences, and helping you decide which is the better fit for your business.
So, how does factoring differ from accounts receivable financing? Let’s discuss – first, invoice factoring.
What Is Invoice Factoring?
Invoice factoring is an alternative financing solution where outstanding invoices are converted into immediate cash. Factoring serves as a reliable alternative to a line of credit and other traditional bank loans, helping businesses that:
- Deal with slow-paying customers
- Experience seasonality or are undergoing dynamic change
- Want to expand or are in the process of rapid growth
- Want to launch as a start-up
How Invoice Factoring Works
In factoring, a business sells its invoices to a third-party factor (factoring company). The business presents a schedule to the factoring company detailing which invoices among their accounts receivable they’re planning on factoring. Then, the factoring company advances a predetermined percentage (typically 80-90%) of each total invoice value into the business’s checking account.
It’s important to note that by this time, your business should have already notified your customer(s) that going forward, they will forward all payments to the factoring company, not your business. Therefore, once your customer pays the invoice to your factor, the factor can simply pay out the remaining invoice amount to your business (minus a small factoring fee, typically 0.5 to 3.75%).
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 (or are undergoing) steady growth and expansion
- Experience seasonality or another form of dynamic change
- May not be in a position for a traditional bank loan, but working towards it
If the small details confuse you, just remember this: if your business is a good fit for AR financing, you’re likely a good fit for invoice factoring (or vice versa).
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.
While this is different from invoice factoring (where receivables are not pooled) there will be a minimum monthly fee for both factoring and AR financing. Therefore, if you’re utilizing AR financing, and you choose not to pull from your pool during a certain month, you’ll still be charged that minimum monthly fee.
Why Do Companies Use Invoice Factoring?
Invoice factoring is an ideal financing solution for a small business owner who does not want to wait up to 30, 60 or 90 days for their receivables to roll in. These long payment terms can disrupt cash flow, especially for small businesses, which is why factoring is so popular for start-ups and new businesses.
Gone are the days of waiting weeks to months for customers to pay and having to figure out how to politely ask for payment over email. Instead, you can get cash within 1 to 2 business days to keep your cash flow positive.
Invoice Factoring vs. AR Financing
The main difference between invoice factoring and AR financing lies in the underwriting criteria of the deal structures.
AR financing provides you a pool of funds to borrow against your invoices, while factoring is the process of selling an invoice, receiving a cash advance, and paying a small fee on each individual invoice once your customer pays. The remaining value of the invoice is funded to your business.
With AR financing, you’re charged a fixed monthly fee. No matter how much you pull from your credit facility for a given month, say $2,000 vs. $10,000, you’ll end up paying the same fee. It works more like asset-based lending with traditional interest rates and can get a bit more complicated than standard factoring.
With factoring, the fee is based off of the face value of each invoice (typically 0.5% to 3.75%).
While businesses with subpar credit can look to both of these financing options as great alternatives, there is a tad more leniency with factoring regarding creditworthiness during the application process. That said, the most important aspect of the background checks for both AR financing and factoring remains the credit history of your customers. Factors want to ensure customers are reliable to pay their invoices.
However, keep in mind that these options remain very similar overall, according to altLINE Senior Vice President Jim Pendergast.
“A lot of people tend to get caught up with these terms, thinking they are completely different,” said Pendergast. “But factoring and financing are generally very similar products aside from a few technical differences. If you’re a fit for one, you’re highly likely a fit for the other.”
Invoice Factoring vs. AR Financing Fees
The exact fees associated with accounts receivable financing and invoice factoring depend on the customer, so it’s difficult to compare.
With that said, factoring and AR financing fees are both determined based on various factors such as:
- Your customer’s creditworthiness
- The age and size of your business
- Your industry
- Average length of customer payment terms
- How much you’ll be factoring (or financing) per month
For more information, read our article on factoring rates and fees.
Which Option Is Best for Your Company?
Both invoice factoring and AR financing benefit businesses by providing funds in advance of collection. When cash flow timing matters most, both of these working capital 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 does have a touch more strictness around the credit profile.
Good Fits for Invoice Financing
If your business matches some or all of these characteristics, you may be a fit for invoice factoring:
- B2B business
- Long payment terms
- Fair to poor credit history
- Limited operating history
- Few/no hard assets to borrow against
Good Fits for AR Financing
There’s a good chance that if you’re a fit for invoice factoring, you could be a fit for AR financing since many characteristics are the same. The main difference here is credit (invoice) size.
- B2B business
- Large outstanding invoices
- Strong outstanding receivables
- Fair to above average credit history
- Limited operating history
- Few/no hard assets to borrow against
If you have any question about factoring or financing, don’t hesitate to fill out our free factoring quote form or contact one of our representatives at +1 (205) 607-0811. We’d be happy to chat and let you know if your business might be a fit.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.
