When people hear about a company that has pledged its accounts receivable, they often get the impression that pledging and factoring are similar. However, as we’ll see in today’s post, there are some fundamental differences between these two financing methods.
What Is Factoring of Accounts Receivable?
Factoring your accounts receivable, or receivables factoring, means selling your unpaid invoices to a third-party company known as Factor.
One of the main advantages of this system is that the Factor pays you upfront and then collects the payment from your customers.
This saves you the trouble of having to wait 30 to 90 days for your customers to pay you, giving you the fast cash you need to cover recurring expenses or take advantage of business opportunities.
To learn more about factoring, check out our previous blogs, “Invoice Factoring for Working Capital: Is It a Good Idea?” and “Why Do Companies Factor Their Receivables?”
What Is Pledging?
In the world of business and finance, pledging refers to the act of offering an asset as collateral to secure a loan.
The assets a company can pledge range from real estate and inventory to equipment or accounts receivable. Under a pledging agreement, the lender has the right to seize the pledged asset if the borrower defaults on their loan.
For example, in the case of accounts receivable, a business can pledge its unpaid invoices as collateral for a loan.
It’s worth noting that even if you pledge your receivables, you are still responsible for collecting the debts from your customers.
The Difference Between Factoring of Accounts Receivable and Pledging
Both pledging and factoring allow you to use your unpaid invoices to get cash. However, there are some significant differences between factoring and pledging.
Factoring is a straightforward process: you are simply selling your unpaid invoices. By contrast, pledging is part of a more complex system because you use the invoices as collateral to qualify for a loan.
This means that factoring is the simplest, most efficient alternative of the two. With factoring, you are selling something that belongs to you, while pledging involves more variables and risk.
Another important difference is that receivables factoring results in a transfer of ownership. In other words, the factor becomes the new owner of your unpaid invoices. When you pledge your receivables, on the other hand, you retain both ownership and collection responsibilities.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.
Get in touch by email (info@acsfactors.com) telephone (909-946-5599), or through our social media accounts on Facebook, Twitter, and YouTube.
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