As you expand your business to reach new clients’ demands, some needs become increasingly important. Some of these include the need to not only access liquidity but to also optimize your working capital, to minimize your credit risks.
You could wait for early payments from your clients’ outstanding invoices. But, most companies that get into this situation opt for accounts receivable (AR) financing and factoring to trade their receivables for fast cash at hand.
Most financial institutions offer such tools for those that seek receivable-based financing. However, since the above two solutions are the most confused tools, the following piece will aim to elucidate the differences.
If you run a business where your clients pay for the services that you offer on a later date, you understand how tight your cash flow can get. It is here that the financial institutions you are planning to work together with buys the outstanding invoices to provide you with the capital you need.
You, however, should agree with your financier the discounted rate to sell your sell ownership of these invoices, to keep your business afloat.
Unlike in factoring, you retain ownership of the outstanding invoices in accounts receivable financing. Typically, AR factoring falls under asset-based loans. You use the invoices as collateral when obtaining short-term funding. Your financier will, however, first determine risk level, and the size of the capital.
You agree that cash flow issues are among the most prominent obstacles that companies that seek to expand into new markets face. It is finding an appropriate way of freeing up extra funds that make the difference in growing your company to achieve great success.
But, now that you can differentiate between factoring and AR financing quite well, you will know which will work best for you when planning to optimize your working capital.