There are three primary types

Asset-based lending (ABL): Also known as a business line of credit or traditional commercial lending, asset-based lending is an on-balance sheet technique and typically comes with significant fees. Companies commit the majority of their receivables to the program and have limited flexibility about which receivables are committed.

Traditional factoring: In factoring, different than reverse factoring, a business sells its accounts receivable to a funder – but the initial payment is for less than the full amount of the receivable. For example, a company may receive early payment for 80 percent of the invoice amount minus processing fees. Compared to asset-based lending, companies have more flexibility in choosing which receivables to trade, but funder fees can be high and credit lines may be smaller. As with ABL, any factored receivables are recorded on the company’s balance sheet as outstanding debt.

Selective receivables finance: Selective accounts receivables finance allows companies to pick and choose which receivables to advance for early payment. Additionally, selective receivables finance enables companies to secure advanced payment for the full amount of each receivable. Financing rates are typically lower than other alternatives, and this method may not count as debt based on the program structure. Because selective receivables finance stays off the balance sheet, it does not impact debt ratios or other outstanding lines of credit.