There is a plethora of working capital funding options for small business owners in America. Between equity funding, bank and private loans, cash advances, and many other borrowing options, it’s hard to tell the difference between them (some don’t even have differences!). One of the most commonly inquired options is ‘invoice discounting.’ What is invoice discounting and how does it differ from loans or factoring? The real question you should be asking is how is it to loans or factoring?
What are Loans?
Loans are a simple process. You borrow money from the bank, or other entity, and in return, the bank will receive its money back over time, plus and agreed upon interest rate, so they may adjust their immediate loss for future inflation. Everyone at some point or another will withdraw a loan from a financial institution. Almost all loans require some form of collateral – items of value that the institution can seize if you are unable to make your payments. Loans with collateral contain an inherent risk, but you can receive your funding quickly and thoroughly.
What is Accounts Receivable Financing?
Accounts receivable financing, otherwise known as factoring, is used by small businesses who don’t want to – or can’t – obtain traditional loans. Most businesses have a division known as accounts receivable which shows all of the money that the company is owed, such as debts or credits that customers have taken. The most common form of accounts receivable are a business’ invoices. The financial institution would take this list of accounts receivable and finance you up to the amount that is owed on these accounts. You are not borrowing money from them; they are buying the debt from you. Commonly, the company that purchases these accounts takes a small percentage of the value, instead of applying interest. When the institution, also known as a factor, purchases these accounts, they are the ones responsible for collecting the debt from your customers. In many cases, if the factor cannot collect on the invoice, you are free of liability because the factor has assumed the risk of nonpayment.
What is Invoice Discounting?
Invoice discounting can be seen as a combination of a loan and accounts receivable financing. All of the processes of a loan still apply in this process, but instead of the collateral being an object or a section of your business, you are offering up the accounts receivable as collateral. The major difference between factoring and invoice discounting is that with discounting, you are still responsible for collecting the debt from your customers, not the institution. If you are unable to collect the debt, your business is responsible for paying back the loan.
At AmeriFactors, we are firm believers in factoring. It is the safest and most efficient way for you to receive the necessary working capital to keep your business running during times of financial stress. If you factor with AmeriFactors, you will be able to keep your business running optimally while not putting your business on the line. Contact us today to learn more!