In today's tight credit environment, increasingly more companies are having to turn to alternative and non-bank financing choices to access the capital they need to have to keep the gears of their company running smoothly.
You will find a number of unique tools offered to owners of cash-strapped companies in search of financing, but two of the primary ones are factoring and accounts receivable (A/R) financing. Occasionally, organization owners lump these two alternatives together in their minds, but in reality, there are a couple of slight differences that result in these being diverse financing products.
Factoring vs. A/R Financing: A Comparison
Factoring is the outright buy of a business outstanding accounts receivable by a commercial finance organization, or "factor." Normally, the factor will advance the enterprise between 70 and 90 percent of the value of the receivable at the time of buy; the balance, less the factoring fee, is released when the invoice is collected. The factoring fee-which is based on the total face value of the invoice, not the percentage advanced-typically ranges from 1.5-5.5 percent, depending on such factors as the collection risk and how quite a few days the funds are in use.
Under a factoring contract, the organization can typically pick and select which invoices to sell to the factor-it's not normally an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it really is paid. The factor will essentially grow to be the business defacto credit manager and A/R department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.
A/R financing, meanwhile, is far more like a conventional bank loan, but with some key differences.
Although bank loans could be secured by unique kinds of collateral which includes plant and equipment, real estate and/or the personal assets of the company owner, A/R financing is backed strictly by a pledge of the business assets associated with the accounts receivable to the finance corporation.
Under an A/R financing arrangement, a borrowing base of 70 to 90 percent of the qualified receivables is established at every draw against which the company can borrow money. A collateral management fee (usually 1-2 percent) is charged against the outstanding amount and when cash is advanced, interest is assessed only on the quantity of money in fact borrowed. Normally, so that you can count toward the borrowing base, an invoice must be less than 90 days old as well as the underlying business must be deemed creditworthy by the finance company. Other conditions may well also apply.
Features and Advantages
As you'll be able to see, comparing factoring and A/R financing is type of tricky. One is in fact a loan, whilst the other is the sale of an asset (invoices or receivables) to a third party. On the other hand, they act extremely similarly. Here are the main features of every to contemplate just before you decide which one is the most effective fit for your corporation:
Factoring:
Offers additional flexibility than A/R financing for the reason that companies can pick and select which invoices to sell to the factor.
Is fairly straightforward to qualify for. Perfect for newer and financially challenged businesses.
Simple fee structure helps the corporation track total costs on an invoice-by-invoice basis.
A/R financing:
Is commonly less high-priced than factoring.
Tends to be simpler to transition from A/R financing to a standard bank line of credit when the firm becomes bankable again.
Offers less flexibility than factoring due to the fact the business should submit all of its accounts receivable to the finance business as collateral.
Businesses will generally require a minimum of $75,000 a month in sales to qualify for A/R financing, so it may well not be readily available for incredibly little organizations.
Transitional Sources of Financing
Both factoring and A/R financing are usually considered to be transitional sources of financing which will carry a company via a time when it does not qualify for standard bank financing.
After a period normally ranging from 12-24 months, companies are usually able to repair their financial statements and turn into bankable once again. In some industries, on the other hand, corporations continue to factor their invoices indefinitely-trucking is an example of an industry that relies heavily on factoring to keep its cash flowing.
You will find a number of unique tools offered to owners of cash-strapped companies in search of financing, but two of the primary ones are factoring and accounts receivable (A/R) financing. Occasionally, organization owners lump these two alternatives together in their minds, but in reality, there are a couple of slight differences that result in these being diverse financing products.
Factoring vs. A/R Financing: A Comparison
Factoring is the outright buy of a business outstanding accounts receivable by a commercial finance organization, or "factor." Normally, the factor will advance the enterprise between 70 and 90 percent of the value of the receivable at the time of buy; the balance, less the factoring fee, is released when the invoice is collected. The factoring fee-which is based on the total face value of the invoice, not the percentage advanced-typically ranges from 1.5-5.5 percent, depending on such factors as the collection risk and how quite a few days the funds are in use.
Under a factoring contract, the organization can typically pick and select which invoices to sell to the factor-it's not normally an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it really is paid. The factor will essentially grow to be the business defacto credit manager and A/R department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.
A/R financing, meanwhile, is far more like a conventional bank loan, but with some key differences.
Under an A/R financing arrangement, a borrowing base of 70 to 90 percent of the qualified receivables is established at every draw against which the company can borrow money. A collateral management fee (usually 1-2 percent) is charged against the outstanding amount and when cash is advanced, interest is assessed only on the quantity of money in fact borrowed. Normally, so that you can count toward the borrowing base, an invoice must be less than 90 days old as well as the underlying business must be deemed creditworthy by the finance company. Other conditions may well also apply.
Features and Advantages
As you'll be able to see, comparing factoring and A/R financing is type of tricky. One is in fact a loan, whilst the other is the sale of an asset (invoices or receivables) to a third party. On the other hand, they act extremely similarly. Here are the main features of every to contemplate just before you decide which one is the most effective fit for your corporation:
Factoring:
Offers additional flexibility than A/R financing for the reason that companies can pick and select which invoices to sell to the factor.
Is fairly straightforward to qualify for. Perfect for newer and financially challenged businesses.
Simple fee structure helps the corporation track total costs on an invoice-by-invoice basis.
A/R financing:
Is commonly less high-priced than factoring.
Tends to be simpler to transition from A/R financing to a standard bank line of credit when the firm becomes bankable again.
Offers less flexibility than factoring due to the fact the business should submit all of its accounts receivable to the finance business as collateral.
Businesses will generally require a minimum of $75,000 a month in sales to qualify for A/R financing, so it may well not be readily available for incredibly little organizations.
Transitional Sources of Financing
Both factoring and A/R financing are usually considered to be transitional sources of financing which will carry a company via a time when it does not qualify for standard bank financing.
After a period normally ranging from 12-24 months, companies are usually able to repair their financial statements and turn into bankable once again. In some industries, on the other hand, corporations continue to factor their invoices indefinitely-trucking is an example of an industry that relies heavily on factoring to keep its cash flowing.
Factoring Vs. A/r Financing