Receivable financing, also known as accounts receivable financing or factoring offers various methods for businesses to convert unpaid invoices into immediate working capital. Understanding the four common forms is vital for businesses exploring financing options:
Traditional factoring: Involves selling accounts receivable to a financing company at a discounted rate, enabling immediate cash flow by letting the factor collect payments directly from customers.
Spot factoring: Allows businesses to select and sell specific invoices for immediate cash, providing flexibility in choosing which invoices to factor based on immediate cash needs.
Invoice discounting: Uses accounts receivable as collateral for a line of credit or loan, letting the business retain control over collecting payments from customers and providing access to funds without immediately selling the invoices.
Reverse factoring (supply chain finance): Works with creditworthy customers to pay the business's invoices, allowing early payment access while extending payment terms to customers.
Considering these forms helps businesses make informed decisions to suit their unique financial situations.