Some people think that accounts receivable financing is the same as factoring. Actually, there are several differences between these types of business financing options. All in all, you can select from three different AR financing programs, each with their own benefits.

Invoice Factoring

Factoring is relatively straightforward. It involves selling unpaid invoices in exchange for a cash advance. This helps businesses deal with cash flow problems without needing to apply for a loan. Factoring is simple for companies that have poor credit, so it’s popular with small businesses and new businesses going through tough times.

With factoring, you get paid immediately instead of waiting 30, 60 or 90 days for your customers to pay. Usually, you can get funds deposited in your account in under 24 hours.

Complete Accounts Receivable Financing

This essentially involves outsourcing your accounts receivable department to a third-party lender. You don’t worry about bill collection, though you do submit invoices to your customers.

You receive financing for the majority of each invoice’s value immediately. The rest is deposited in your bank account after the client pays the bill. There is a small percentage-based fee per transaction. This type of fast-moving funding is a good choice for businesses with a high volume of purchases and sales, or ones that need plenty of capital on hand at all times.

Fees are higher than with other types of AR financing, but this option also involves the least work on your part. You don’t have to hire an accounts receivable department or worry about complex accounting.

Selective AR Financing

This is a hybrid between invoice factoring and traditional accounts receivable financing. It keeps receivables off your business’s balance sheet, which is an advantage if you’re planning on applying for long-term real estate loans or equipment loans in the future.

With selective AR financing, you decide which receivables to finance and which to wait for normally. You receive the full amount of each invoice right away. The only downside is that you usually have a cap on the total amount of financing you can receive in a specific period.

Other Financing Options

Another option is to apply for asset-based lending, or secured business lines of credit. This option is flexible but carries higher fees. The best choice for funding is the one that benefits your business’s cash flow the most. Knowing all of the possibilities available for your business lets you choose financing that takes care of your needs and saves you money.