Factoring and Cash Advances: What’s the Difference?

By September 2, 2014Uncategorized

Applying for quick cash–whether through a small business loan, cash advance, or other alternative funding source–brings about new terminology. Of course there’s the annual percentage rate or APR, basically the cost to you to borrow money. When borrowing or accessing a loan, a company can either incur a payback schedule, like with a cash advance or outsource management of accounts receivable through factoring.

What is Factoring?

Factoring is a financial transaction in which a business sells its accounts receivable to a third party commercial financial company at a discount. A business will sometimes factor its receivable assets to meet the cash needs most present and immediate. Maybe a vital piece of equipment is down or there is damage to a building not covered by insurance or a too-good-to-pass-up opportunity comes along to enhance business growth. Any of these scenarios may lead to a more urgent need for cash approval.

Advantages and Disadvantages of Factoring

Also known as “accounts receivable financing,” factoring is done so a business can access cash more quickly than it would waiting 30-60 days for a customer payment. A factoring company purchases your invoices and advances you funds in as little as 24 hours. Often a business can get up to 80 to 95% of an invoice amount depending on the industry and your customer’s credit history.

A few disadvantages include giving a factoring company access to managing your accounts receivables. Customer disputes are potentially more worrisome and should be settled quickly to avoid issue with the factoring company. Also, a factoring company can apply credit limits to your customers, potentially affecting business relationships.

Cash Advances

An advance on future earnings differs from factoring because you are responsible to pay back funds you have borrowed over time based on a percentage of future sales. Cash advances are also quick and easy to apply for, putting funds at your fingertips for capital investments, the ability to repair equipment or to hire employees.


Learn more about cash advances for small businesses at Lendini.com.

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