Factoring is a sale: you sell invoices to a factor, which pays most of their value upfront and collects directly from your customers. Accounts receivable financing is a loan: you borrow against your invoices, keep ownership, and collect from customers yourself. Factoring is easier to qualify for. AR financing is often cheaper and invisible to your customers.
Both turn unpaid invoices into cash. The difference is who owns the invoices, who talks to your customers, and how much reporting you take on.
What is the core difference between factoring and AR financing?
With factoring, each invoice changes hands. The factor buys it, advances you a percentage, notifies your customer to pay the factor, collects, and sends you the remainder minus a fee. The factor is underwriting your customers.
With AR financing, the invoices stay yours. A lender sets up a revolving credit line secured by your receivables. You borrow up to a percentage of eligible invoices, called your borrowing base. Customers keep paying you, and those payments pay down the line. The lender is underwriting your business and its collections, not just your customers.
How do factoring and AR financing compare side by side?
| Invoice factoring | AR financing | |
|---|---|---|
| What happens to the invoice | Sold to the factor | Pledged as collateral; you keep it |
| Who collects from customers | The factor | You |
| Do customers know | Yes, through a notice of assignment | Typically no |
| Structure | Purchase of individual invoices or batches | Revolving line against a borrowing base |
| How you're charged | Discount fee per invoice, often tiered by days outstanding | Interest on the amount drawn, plus facility fees |
| Typical advance | 70% to 90% of each invoice | 70% to 90% of eligible receivables |
| Main underwriting focus | Your customers' credit | Your financial health, collections, and customer base |
| Your reporting burden | Submit invoices and delivery proof | Regular aging reports and borrowing base certificates |
| Setup time through Sagamore partners | Often 3 to 5 business days | Often 5 to 7 business days |
| Sagamore partner range | $10K to $5M | $25K to $5M |
How much cash can each produce from the same receivables?
The advance rate is only half the story. What counts as "eligible" often matters more, especially for AR financing.
Say a janitorial supply distributor has $200,000 in open receivables:
- $180,000 is under 90 days old
- $20,000 is over 90 days old
- One large customer, a hospital system, owes $80,000 of the current amount
AR financing, with illustrative terms: 80% advance rate, invoices over 90 days excluded, and any one customer capped at 30% of eligible receivables.
| Step | Calculation | Amount |
|---|---|---|
| Total receivables | $200,000 | |
| Remove invoices over 90 days | $200,000 − $20,000 | $180,000 |
| Concentration cap on hospital system | 30% × $180,000 = $54,000 allowed; $80,000 − $54,000 = $26,000 excluded | $154,000 eligible |
| Borrowing base at 80% | $154,000 × 80% | $123,200 |
Factoring, with illustrative terms: the factor approves each customer and buys current invoices at 85%. It declines the over-90-day invoices but is comfortable with the hospital system's credit.
| Step | Calculation | Amount |
|---|---|---|
| Invoices the factor buys | Current invoices only | $180,000 |
| Advance at 85% | $180,000 × 85% | $153,000 |
In this case, factoring puts about $30,000 more in the distributor's hands upfront, because the factor cares about the hospital's ability to pay, not how concentrated the distributor's sales are. Factors can set their own concentration limits, so this won't hold everywhere. The general pattern does: factoring leans on customer strength, while AR financing applies portfolio-level rules.
Which one costs more?
The pricing works differently, so compare total dollars for the same period rather than headline rates. Using illustrative numbers, not quotes, suppose the distributor needs about $80,000 for 45 days.
Factoring: It sells about $94,000 of invoices at an 85% advance to raise $80,000. At an illustrative 3% fee for invoices paid within 45 days, the cost is about $2,820.
AR financing: It draws $80,000 against its borrowing base at an illustrative 1.5% per month, for 1.5 months, which comes to $1,800 in interest. Add an illustrative $500 monthly facility or monitoring fee for the period, about $750. Total cost is about $2,550.
The gap here is modest. It widens as volume grows, because AR financing charges interest only on what you draw, while factoring charges a fee on every invoice sold. It narrows, or flips, for smaller businesses where fixed monthly facility fees make up a bigger share of the cost.
Beyond price, AR financing costs you time. Borrowing base certificates, aging reports, and periodic audits are real work. Factoring hands off collections, which is a cost saving for a business without a dedicated billing person.
When is factoring the better choice?
Factoring usually fits when:
- Your financial history or credit is thin, but your customers are established companies or government agencies.
- You don't have staff to chase payments, and outsourcing collections is worth something to you.
- Your sales are concentrated in a few large, creditworthy customers that AR lenders would cap.
- You need cash invoice by invoice, not a standing facility.
- Your volume is smaller, where fixed facility fees would weigh heavily.
Trucking companies, staffing firms, and smaller government contractors often start here.
When is AR financing the better choice?
AR financing usually fits when:
- Customer relationships are sensitive, and you don't want a third party contacting your buyers.
- You have steady, sizable receivables. Sagamore's lending partners consider AR financing ideal for businesses with $25K or more in monthly receivables.
- You already run collections well and can produce clean monthly aging reports.
- You want revolving access, borrowing only what you need rather than selling every invoice.
- You have financial statements that support a lender's review of your business, not just your customers.
Distributors, manufacturers, and established service firms with a finance function tend to land here.
Can you move from factoring to AR financing later?
Yes, and it's a common path. A business factors while it's smaller, builds a track record of invoicing and collections, then moves to an AR facility once its revenue, financials, and customer mix support it. The factor's payment history on your invoices can help show a new lender how your receivables perform.
Plan the switch carefully. Factoring agreements often have minimum terms and termination notice periods, and the factor must release its lien on your receivables before a new lender can take a first-position claim. Ask about exit terms before you sign any factoring agreement, not when you're ready to leave.
What do you need to qualify for either?
Sagamore's lending partners require at least 1 year in business, $400,000 or more in annual revenue, and a credit score of 600 or higher for both. Factoring also needs invoices to creditworthy business or government customers. AR financing also needs a portfolio of commercial or government receivables.
Documents that speed up either review:
- A current accounts receivable aging report
- A customer list with contact details and typical payment terms
- Sample invoices and proof of delivery
- 3 to 6 months of business bank statements
- Details of any existing loans or liens on your receivables
If your receivables don't fit either product, or your gap is occasional rather than constant, a line of credit may be simpler. Sagamore is a broker, so we can look at factoring and AR financing offers against the same receivables. If you'd like to compare them on your numbers, start an application with your latest aging report ready.
