Accounts Receivable Financing vs Factoring - Differences and Examples

Many small businesses in the UK face significant cash flow challenges hampering business growth and success.

A recent study by the Federation of Small Businesses (FSB) shows that about 440,000 UK businesses were at risk of going bankrupt because of late payments. To mitigate these risks, businesses need to explore credit options such as accounts receivable (AR) factoring and AR financing^¹.

This article explores the differences between these two credit options. It also covers Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

💡 Learn more about Wise Business

What is receivables factoring?

Receivables factoring is a financial arrangement whereby a company sells its outstanding invoices at a discount to a third party (factor) in exchange for cash. The factor gives an advance, usually between 75% to 95% of the company’s unpaid invoices, within hours to a few weeks after approval.

This process (also known as invoice factoring) helps businesses with limited cash flow to receive cash without waiting on customers to reconcile invoices. It is ideal for small companies with extended payment terms, usually within 30 to 90 days, to get liquidity, expand their business, or cover their operational expenses.

Here’s a quick rundown of how receivable factoring works:

• A company invoices customers after delivering goods and services. It offers the list of invoices for sale to a factor.
• The factor verifies the customers’ creditworthiness and proposes conditions and rates.
• Both parties agree, sign a contract, and the factor provides about 75% to 95% of the invoice amount and oversees collections.
• Depending on the agreed payment terms or the location of the parties, the business may notify the customer or keep it confidential.
• Once the invoice is due, customers pay the invoice to the factoring company. The factor then remits the balance and deducts the factoring fee (1% to 4% of the invoice per month).

AR factoring is for your business if you want to delegate collections and transfer the liability of unpaid invoices.

What is receivables financing?

Receivables financing is a financial solution that allows the borrower to use its accounts receivable to secure short-term loans from lenders. The loan’s amount is usually 75% to 85% of the total value of the borrowers' accounts receivable.

Unlike traditional loans, receivables financing doesn’t incur any debt on the balance sheet. Instead, the invoices act as collateral against which the lender funds the business. The amount that your company can borrow through accounts receivable financing is based on the value of your outstanding invoice and several other factors. The lender deducts 1% to 5% of the fees from the loan once it’s paid back in full.

Compared to receivables factoring, AR financing doesn’t involve selling your invoices. Instead, you still control your accounts receivable and collections process.

Here’s a walkthrough of how receivables financing works:

• A company invoices customers for goods and services provided and applies for AR financing.
• The lender verifies the company’s customers’ creditworthiness and proposes terms.
• Both parties agree and sign a contract. The factor provides about 75% to 95% of the accounts receivable value.
• Customers pay the business, and the business repays the lender the loan with interest.

AR financing is for your business if you want to oversee debt collection and bear the risk of unpaid invoices.

Note: The UK’s law classifies invoice discounting as a type of invoice factoring² that doesn’t need debtor disclosure. In Scotland, the Publicity Principle necessitates notifying customers of invoice sales³.

Accounts receivable financing vs factoring: key differences

Although both account receivable financing and invoice factoring are ideal short-term finance options for small businesses, they have distinguishing features that set them apart:

Ownership of receivables

With factoring, the business relinquishes control of its accounts receivable to the factor when it sells its unpaid invoices to them. The factor chases and reconciles payments with the customers.

Financing, on the other hand, still lets the borrower retain ownership of its business accounts receivable and collect payments from its customers.

Customer interactions

To handle collections, the factor contacts your customers directly. You lack full control of your customer relationships. This can strain customer relationships.

On the other hand, financing lets you chase invoices, allowing you to manage your relationships with customers.

Financing structure

Factoring involves selling your outstanding invoices to a factoring company at a discounted price. In return, the factor offers an advance of about 70% to 90%. After payment collections, the factor pays your balance and deducts the advance and its fees.

Financing works differently. Instead of selling your accounts receivable, it serves as collateral where you borrow against the value of your outstanding invoices. Once the customer pays, you pay the lender back with the interest.

Note that with invoice financing you pay monthly fees for the loan even when you don’t borrow from it. So you pay for the availability of the funds, not only the use of the funds.

Cost of factoring receivables

Factoring companies determine the cost of factoring receivables using different variables like the

• discount rate
• factoring period
• industry or type of business
• volume of invoices
• type of factoring program (recourse or non-recourse)

Some factors offer a one-time fee, regardless of when your customer pays the invoice, others offer tiered fees, which compound as the debt lingers.

Here are the average factoring rates in 2024 for different key industries^⁴.

Average Factoring Rates 2024

Cost of financing receivables

Most receivables financing companies charge a flat percentage of the invoice value. This is usually within the range of 1% to 5%. The fees are determined by various factors, such as the:

• invoice size
• Invoice age
• the invoice provider’s rates
• average days sales outstanding
• creditworthiness of your customers

Companies like 1st Commercial credit offer invoice financing at 0.9%-1.59%⁵. Note that interest rates might differ from company to company.

FAQs - accounts receivable financing vs factoring

Here are some of the most common questions answered:

What’s the major difference between AR financing vs factoring?

AR factoring involves selling unpaid invoices to a third party (factoring companies) in exchange for cash. AR financing involves using your company‘s accounts receivable as collateral for a loan.

Which is less expensive between AR financing and AR factoring?

AR financing is usually less expensive because it only incurs interest rates like traditional bank loans. Factoring fees can be higher because they include service fees, administrative fees, and interest rates.

How does AR factoring impact a company’s balance sheet?

AR factoring isn’t a debt and therefore isn’t recorded on the company's balance sheet.

Receive international payments with Wise Business

Wise can help UK businesses, freelancers and sole traders get paid by customers in multiple currencies, with low fees and the mid-market exchange rate.

Your Wise Business account comes with local account details to get paid in 8+ major foreign currencies like Euros and US Dollars just as easily as you do in Pounds.

All you need to do is pass these account details to your customer, or add them to invoices, and your customer can make a local payment in their preferred currency. You can also use the Wise request payment feature to make it even easier and quicker for customers to pay you.

Get started with Wise Business 🚀

Sources used:

Sources last checked on date: 26-Jun-2025