Both AR Finance and Factoring can help businesses manage their cash flow by providing immediate cash for outstanding invoices. AR Finance allows businesses to retain control over their accounts receivable and manage their cash flow through a loan-based financing option. In contrast, factoring will enable businesses to sell their accounts receivable to a third-party company in exchange for an advance on the invoice value, with the factor assuming the credit risk and collection responsibility.
Businesses can choose between AR Finance and Factoring solutions from Skyscend based on their specific needs and preferences. AR Finance may be a better option for businesses that want to retain control over their accounts receivable and have the resources to manage their collections process. Factoring may be a better option for businesses that want to outsource their collections process and minimize credit risk.
Accounts Receivable Finance and Factoring are financial products businesses use to manage their cash flow. However, they differ in how they are structured, and the level of control businesses have over their accounts receivable. As an invoice factoring companies, we have discussed the difference between AR Finance and Factoring for you.
What is Accounts Receivable Finance?
Accounts Receivable Finance (AR Finance) is a type of funding in which a lender provides a loan to a business based on the value of its outstanding invoices or accounts receivable. The lender will typically advance a percentage of the invoice value, usually between 80% to 90%, and charge interest on the amount borrowed. The borrower retains control over its accounts receivable and is responsible for collecting payment from its customers. Once the invoice is paid, the borrower repays the loan to the lender with interest.
What is Factoring?
Conversely, factoring is a type of financing in which a business sells its accounts receivable to a third-party company, called a factor, at a discounted rate. The factor assumes the responsibility of collecting payment from the business's customers and pays the business an advance on the invoice value, typically around 80% to 90%. The factor then collects the full payment from the customers and retains a fee for its services. The business has little to no control over its accounts receivable, and the factor assumes the credit risk of the invoices.
Accounts Receivable Finance vs Factoring Solutions
Accounts Receivable Finance (AR Finance) and Factoring are two popular financing options for businesses that need to manage their cash flow by leveraging their accounts receivable. Here is a detailed comparison of the two options:
Factors | AR Finance | Factoring |
Definition | AR Finance is a loan-based financing option in which a lender provides a loan to a business based on the value of its outstanding invoices or accounts receivable. The borrower retains control over its accounts receivable and is responsible for collecting payment from its customers. | Factoring is a type of financing in which a business sells its accounts receivable to a third-party company, called a factor, at a discounted rate. The factor assumes the responsibility of collecting payment from the business's customers and pays the business an advance on the invoice value, typically around 80% to 90%. |
Control | In AR Finance, the business retains control over its accounts receivable and is responsible for collecting customer payments. | In factoring, the factor assumes the responsibility of collecting payment from the business's customers, and the business has little to no control over its accounts receivable. |
Cost | AR Finance charges interest on the amount borrowed, which can range from 1% to 3% per month. The interest rate may vary based on the creditworthiness of the borrower | Factoring charges a discount fee, which is typically around 1% to 5% of the invoice value. This fee is based on the creditworthiness of the business's customers, the length of the invoice payment terms, and the volume of invoices sold. |
Credit risk | In AR Finance, the borrower assumes the credit risk of the invoices, meaning that if the borrower's customers fail to pay, the borrower is responsible for repaying the loan. | In factoring, the factor assumes the credit risk of the invoices, meaning that if the business's customers fail to pay, the factor takes the loss |
Confidentiality | In AR Finance, the borrower can keep the financing arrangement confidential from its customers | In factoring, the factoring arrangement is disclosed to the business's customers, as they are required to make payments to the factor instead of the business. |
In summary, Accounts Receivable Finance and Factoring solutions are useful financing options for businesses that need to manage their cash flow. We at Skyscend allow businesses to retain control over their accounts receivable and manage their cash flow through a loan-based AR financing solution.