What is accounts receivable financing?

Accounts Receivable Financing, also known as AR Financing, is a financial solution where a business sells its outstanding invoices or receivables to a finance company. This allows the business to receive immediate cash, eliminating the waiting period associated with client payments. In essence, AR financing turns your unpaid invoices into instant capital, enabling businesses to maintain a steady cash flow and invest in growth opportunities without being constrained by slow-paying customers.

Accounts receivable loan vs. accounts receivable factoring.

While both accounts receivable financing options, namely accounts receivable loan (AR loan) and accounts receivable factoring, aim to provide businesses with immediate cash to enhance liquidity, there are crucial differences between the two.

An accounts receivable loan (sometimes used interchangeably with accounts receivable financing) is essentially a credit agreement where your business’s unpaid invoices serve as collateral. You maintain control over your accounts receivable and are responsible for collecting payment from your clients. The loan must be paid back based on the agreed terms, regardless of whether your customers have paid their invoices.

On the other hand, accounts receivable factoring involves selling your unpaid invoices to a factoring company at a discount. The factoring company takes over the responsibility of collecting payments directly from your clients. In this case, there’s no debt to repay as the transaction is treated as a sale, not a loan. This is the most common type of accounts receivable financing.