How inventory financing differs from accounts receivable financing
The main difference between inventory and accounts receivable financing is that inventory financing can fund future projects, while accounts receivable financing finances projects you’ve already completed. You can use the funds from accounts receivable financing to pay for any business expense, including buying more inventory. But inventory financing is only available for purchasing inventory.
The financing structures are different as well. Inventory financing involves taking out a loan backed by your inventory, which your business repays with installments. Accounts receivable financing involves selling your business’s unpaid invoices to another company. Factoring companies typically collect on the unpaid invoices from your clients or ask you to pay down the advance as your clients fill their invoices.
Both are considered high-risk financing and can be expensive. But the risks to the lender are not the same. With inventory financing, your collateral may lose value over time. With accounts receivable financing, there’s a chance your clients won’t pay their bills. Inventory financing is also available to retailers and wholesalers, while accounts receivable financing is only available to wholesalers.