If you are wondering about the choice between factoring and accounts receivable financing, it helps to compare their strong points. Both are incredibly useful and offer great deals under the right circumstances, but neither is always the best choice. The trade-offs that make them different are about adapting to your changing financing needs, not competition between the products. In fact, many AR financing firms offer no-recourse factoring options so you can change your financing as needed when you submit your invoices.

1. Outsourced Administrative Work

Factoring tends to cost a little more than AR financing, but that is because you are also outsourcing more work. Non-recourse factoring is essentially the sale of the invoice debt to a third party, so you can discharge it from your outstanding receivables as paid for less than face value. If you work with a consistent service provider, you can even fold the cost of the service into quotes and pass it on to clients, which means you save time you can then use for more productive money-earning activities, like project hours.

2. Payment Structure

Factoring is a one-time payment to cash out your invoices. Accounts receivable financing, on the other hand, is an advance against that income. If you have no penalty fees because all the invoices are paid on time, there is typically a remainder that you are paid at the end, and the two-payment structure of the deal is great for companies that need a cash flow channel as well as a discrete, easily trackable way to reinvest in growth. Which of the two is preferable depends a lot on your clients’ ability to pay on time and your own strategy as a business owner.

3. Fee Structuring

When you look at the offers up front, it seems like both options give you the same amount of working capital after approval. Since accounts receivable financing offers a second-round payment under most circumstances, that means it tends to be less expensive on average. It is based on structured fees that include a penalty schedule, however, so that average can wind up varying a lot in practice.

As a result, even though ongoing lender relationships tend to be more cost-efficient than first-time deals, the penalties can still make your bottom line unpredictable. If you have customers that are prone to random late payments, you will get a smoother ride from factoring by outsourcing more work and saving yourself some guesswork. Over time, it might even be the less expensive option on average, but a lot depends on your clients’ history.