For businesses looking to improve their cash flow situation, understanding the tools available to them is vital. Two options frequently considered are factoring and assignment of receivables. Though they may seem similar at a glance, there are distinct differences between the two methods.
Factoring Explained
Factoring, also known as invoice factoring or accounts receivable factoring, is a financial transaction where a business sells its invoices to a third party (known as a factor) at a discount.
The factor pays you upfront and then collects the invoices from your clients in exchange for a small fee. This lifts the burden of collection off your shoulders and, even more importantly, saves you the trouble of having to wait 30 to 90 days to get paid.
To learn more, read our previous blogs, where we delve into specific aspects of receivables factoring:
- What Happens When a Company Factors Its Receivables
- Invoice Factoring vs Overdraft: What Is the Difference?
- Is Factoring a No-Doc Business Loan?
Assignment of Receivables
Assignment of receivables, on the other hand, refers to the use of receivables as collateral for a loan.
When a business goes this route, the assigned receivables act as security for the lending institution; if the business fails to repay the loan, the lender has the right to collect the outstanding receivables to recover the borrowed amount.
In an assignment of receivables, your company is responsible for pursuing any unpaid invoices, not the lender.
Factoring vs Assignment of Receivables: Key Differences
The primary difference between factoring and assignment of receivables is the type of financing provided.
Factoring is not a loan; it is the sale of an asset (invoices). There is no debt to repay, and the business’s balance sheet does not reflect a borrowing transaction. In the case of the assignment of receivables, the business takes on a liability in the form of a loan, with its receivables as collateral.
With factoring, the factor takes control of bill collection and assumes the credit risk for customer non-payment. In contrast, with the assignment of receivables, the business retains control of its customer relationships and the collection process, bearing all of the credit risk.
Wrapping It Up
While both factoring and assignment of receivables are effective ways to enhance business liquidity, they serve different needs and carry different implications. Understanding the nuances of each will allow businesses to make the best decision for their specific circumstances.
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.
