Factoring vs. Accounts Receivable (A/R) Lending

Factoring and A/R lending are two distinct financing options, with key differences in both their legal and operational aspects. When a company engages in factoring, it sells its accounts receivable invoices to a third party, known as a factor, at a discounted rate. The factor takes immediate ownership of the invoices and gains the right to collect payment directly from the account debtor. In contrast, an A/R lender only takes ownership of invoices if the borrower defaults on their loan agreement, and account debtors are not legally obligated to pay the lender directly unless notified of a default by the borrower.

In terms of operations, a factor focuses on tracking and collecting payment for each individual invoice it has purchased. This often involves direct contact with account debtors as part of the collection process. An A/R lender, on the other hand, does not track the payment status of individual invoices and typically has little to no interaction with account debtors. Instead, an A/R lender may set up a "lockbox account" where all invoice payments are deposited and then regularly swept by the lender to deduct loan payments, fees, and other charges due from the borrower.

Many financial service companies offer both factoring and A/R lending services. While A/R lending programs may be less expensive than factoring programs, they can be more difficult to obtain as lenders typically require borrowers to have greater financial strength than factors require from clients. The distinction between factoring and A/R lending can sometimes become blurred, such as in the case of recourse factoring, which has some legal similarities to A/R lending in certain states despite being operationally different.