Factoring Financing is a type of Asset Based Financing product in which a business sells its accounts receivable, in exchange for an upfront advance against the value of that receivable.
This is different from Accounts Receivables Financing due to the fact A/R Financing will only advance on a receivable the receivable is not purchased.
Meaning A/R Financing leaves the collection of the debt to the business as the business still owns the receivable.
In Factoring Financing, a business sells its receivables to the financing company in exchange for a higher advanced percentage on the receivable. Therefore the Factoring Financing company assumes the role of collector and must now collect upon said receivable.
Selling the receivable via Factoring can afford a business a higher upfront funding against the value of the receivable. For example, A/R Financing can typically advance up to 80% of the amount of receivable, yet a business can be advanced up to 95% of a receivable by selling it on the Factoring side.
The con to this pro of a higher advance amount is that the financing firm now owns that receivable and now will expose that to the business client once the financing company calls to collect upon the debt now.
In that instance, some businesses may find that level of interaction with their customer by the financing company to be too intrusive and may hinder the growth of the business with that customer. If this would be an issue, one can simply turn to A/R Financing.