Two common definitions are used about accounts receivable (AR) financing. The general one is simply business financing based around accounts receivable. Invoice factoring and invoice discounting come under this umbrella term.
More specifically, however, accounts receivable financing uses your invoices as collateral for a line of credit from businesses like Fundygo. It is not a normal business line of credit, but one that is backed by your asset. A lender gives you an asset-backed credit line based on the quantity and quality of your outstanding invoices. Invoice amounts due from your customers also fall under the asset side of the balance sheet.
AR Financing versus Invoice Factoring
A related term, invoice factoring has been mentioned above. This is a form of financing which is a little bit different from the other one. Invoice financing gives you a flexible credit line. It is flexible because you can draw on the line when you require money. Your invoices are not sold to your lender. Instead, these are used to secure the credit line.
With invoice factoring, on the other hand, you sell your outstanding invoices to a lending company in exchange for immediate payment. You will get a large chunk of the invoice total in advance – think anywhere between 80% and 95% of the total. When your customer pays the original invoice amount, you will get the balance amount, minus fees charged by that lender.
One more difference between accounts receivable financing and invoice factoring lies in the way payment is being collected. Once you choose AR financing, you collect payments from customers as usual. In other words, you will not inform your customers that you work with a lender, which is a third-party to both you and them.
With invoice factoring, the duty to collect payments from customers lies on not you but your factor. Confused? A factor is anything but the company to whom you have sold your invoices. Unlike in accounts receivable financing, where you collect payments from customers and then relay those to your lender, the factor takes care of this part in invoice factoring. These are the same payments that company finance to your business. So it can be said that the factor acts as a middleman in this process.
Invoice factoring is generally a good option for small companies which have neither the resources nor time to collect payments from their customers.