AR Financing vs Bank Financing


In today’s fast-paced business environment, both entrepreneurs and seasoned business owners are constantly on the lookout for new and better ways to secure the financing they need when they need it. While traditional bank financing is a great choice for long-term business loans or lines of credit, there are times when stop-gap financing is needed sooner rather than later. For specialized needs such as this, AR financing is an excellent option to consider.

Accounts receivable (AR) is a standard reconciliation method that tracks payments owed to a business for products and/or services provided. As most businesses are aware, however, it can take a significant amount of time for payments to ultimately reconcile. While this should come as no surprise to those who are familiar with the process, variability associated with the timing of these payments can often create a short-term need for liquid cash.

AR financing is a popular solution for avoiding cash flow issues that are associated with the timing of receivables. The process is a simple one that involves the selling of AR invoices to a reputable third party known as a “factor.” The factoring company will then advance the business a reduced percentage of the receivable amount and begin the process of collecting on the sold invoices. This not only provides businesses with the cash they need upfront, but it also frees up a considerable amount of time that would have been spent on invoice collections.

When it comes to strategizing for the long-term, bank financing is generally something a business should begin preparing for well in advance. Loans and lines of credit offered by banks are extremely helpful tools for raising capital, purchasing equipment or property, business expansion, and much more. The drawbacks to this type of financing, however, are the strict approval requirements, the time it takes to access the funds once approved, and the often significant expenses associated with traditional bank lending.

It’s important to know that AR financing is not a loan and there are no payments to keep track of. Moreover, the factoring process requires very little paperwork and can generally approve and provide a business with funds in a matter of days. Once the factor successfully collects on the receivables sold to them by a business, the balance of the combined invoices is paid to the business minus a nominal service fee and nothing more is owed.

Sometimes securing the right financing for a business can be an uphill battle. Traditional bank financing can be a good option in many cases, but the time and work involved with the process can be unfeasible for those who need a more timely solution. As such, AR financing is a simple and cost-effective way to ensure that a business meets its cash-flow needs without going through the hoops and ladders of taking out a traditional loan.


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