Is Invoice Factoring the Same as AR Financing?

Last Updated on December 27, 2022

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 (AR) financing interchangeably.

Is factoring the same as AR financing? In this post, we’ll address the similarities and differences between factoring and accounts receivable financing as we see it. For a quick overview, see the Financing Product Comparison table.

Accounts Receivable Financing vs Factoring

The key difference between accounts receivable financing and factoring is how your invoice is used. In accounts receivable financing, your invoice is used as loan collateral, while in AR factoring, your invoice is bought. Simply put, invoice factoring provides cash advances, while AR financing provides loans.

That said, these options are similar in that your application may be turned down if your invoice does not fulfill the factoring company or bank’s conditions.

What is Invoice Factoring?

In a previous post, we covered 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 The Difference Between Invoice Discounting And Factoring?

The main difference between invoice discounting and factoring is how you get the money. In invoice factoring, you sell invoices to the factor, while in invoice discounting, you take a loan against outstanding customer invoices.

When you factor invoices, you usually get 70-90% of the owed value. Meanwhile, you can get a loan worth the full outstanding amount through invoice discounting.

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.

What Does AR Stand For In AR Financing?

AR in AR financing stands for “accounts receivable”, referring to the money that clients owe you for goods or services received but have yet to be paid. Some clients have long payment cycles, which disrupt cash flow and make maintaining your business more challenging.

What Is The Difference Between Finance Receivables vs Accounts Receivables?

The difference between finance receivables and accounts receivables (AR) is that AR refers to the money you are owed. In contrast, finance receivables is the action taken to receive the money owed.

Financing receivables, sometimes known as AR financing, entails putting your invoices up as loan collateral to receive the money owed without waiting for clients to pay.

Why Do Companies Use AR Factoring?

Companies use AR factoring to receive the money they are owed without waiting for clients to pay. Client payments can take 30, 60, or even 90 days to clear, which can disrupt cash flow. Therefore, some companies turn to AR factoring to get the money within 1 or 2 business days.

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 has more strictness around the credit profile. Consequently, AR financing typically offers preferred financing terms.

Good fit for invoice factoring?

If your business matches some or all of these characteristics, you may be a fit:

• B2B business
• Long payment terms
• Poor credit history
• Limited operating history
• Few/no hard assets to borrow against

Related: Factoring vs. Loan

Good fit for AR financing?

These characteristics are largely the same, with the main difference being credit + invoice size:

• B2B business
• Large outstanding invoices
• Strong outstanding receivables
• Fair/strong credit history
• Limited operating history
• Few/no hard assets to borrow against

How do the fees compare?

The fees associated with accounts receivable financing are generally lower than for invoice factoring. That’s because of the higher average credit profile associated with AR financing, as well as the overall size of the invoices being sold. For more information, read our article on factoring rates and fees.

Answering Your Questions

Here at altLINE, 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.