At first glance, it may appear receivable loans and factoring are the same financial option. However, upon closer inspection, there are several significant differences between two which are important for a business to consider.
For small businesses, receivable loans and factoring are typically applied to the same type of accounts receivables (AR). The business has an outstanding invoice to another business, a B2B or business to business transaction, and there is a gap between when the goods or services are provided and when payment is made.
In this scenario, the seller or service provider is left with a deficit in cash to continue daily business activities such as payroll, inventory purchases, and other requirements. To find working capital funding a small business can turn to receivable loans or factoring as a solution to this problem. Both supply cash in relatively short time, but each has different features and potential costs to consider.
Receivable Loans
Receivable loans, which may also be called receivables based financing, are a true loan. The financial company offering receivable loans evaluates a business based on the value of the outstanding AR as well as the net worth of the company. In addition, in virtually all cases, the owner(s) of the business will have to provide a personal guarantee for the loan.
As can be imagined, this can be a lengthy process with specific requirements for the small business to meet to obtain these loans. In addition, as a loan, there will be the requirement of structured payments over the duration of the loan. Missed or late payments can have an impact on the overall financial picture of the small business, and it will reflect on the company’s overall debt.
Factoring
Factoring is very different than receivable loans in the application process as well as the structure of the funding. Factoring allows the business to sell the asset, the AR, to the third party factoring company. As such, there is no loan, no repayment, and no debt carried by the company for this type of funding.
In addition, with factoring, there is no concern about collecting on the invoice by the business as there is with receivable loans. Factoring turns the AR over to the third party, with receivable loans the small business is required to collect on the AR and take all the risk of the B2B transaction.
Choosing factoring over receivable loans is an option any small business should consider. With fast approval, funding within days, and no debt this may be the answer to a small business cash flow challenge.
For more information on the benefits of factoring over receivable loans visit us online. At United Capital, we provide factoring for businesses of all sizes.
