Receivables Financing vs. Factoring

While often used interchangeably in casual conversation, receivables (invoice) financing and factoring are structurally distinct facilities with different legal treatments regarding assignment, collections, and recourse.

Factoring

Factoring involves the absolute sale and assignment of the accounts receivable ledger (or specific invoices) to a third party (the Factor).

• Assignment: The invoices are legally sold.
• Disclosure: Usually disclosed. The buyer is notified to make payment directly to the Factor's account.
• Collections: The Factor often takes over the credit control and collection process.
• Without Recourse vs With Recourse: In "without recourse" factoring, the Factor absorbs the credit risk if the buyer defaults due to insolvency. In "with recourse", the risk remains with the supplier.

Receivables (Invoice) Financing

Invoice financing is typically structured as a loan secured against the receivables, rather than a true sale of the asset.

• Assignment: The invoices serve as security but remain the property of the supplier.
• Disclosure: Can be confidential (undisclosed) where the buyer continues to pay into a trust account in the supplier's name, unaware of the lender's involvement.
• Collections: The supplier usually retains full control over the sales ledger and the relationship with the buyer.
• Recourse: Almost always with full recourse back to the supplier.

Key Operational Differences

Factoring is often favored by businesses that also want to outsource their credit control, or those seeking off-balance-sheet treatment (in the case of true without-recourse factoring). Receivables financing is favored by businesses that want to maintain strict control over their buyer relationships and collections process.

Disclaimer: General information only, not financial advice. Legal definitions and accounting treatments depend on jurisdiction and the specific facility agreement.