Invoice Factoring vs Invoice Financing

Invoice Factoring vs. Invoice Financing SummaryInvoice Financing is a type of asset based lending which allows you to borrow against any outstanding invoices you may have. With factoring you are selling your invoices to a factoring company at a discount.

Knowing the differences between invoice factoring and invoice financing, as well as understanding each of them separately, is key to any modern-day business owner.

Businesses often need extra cash to maintain operations or take advantage of opportunities. One way to get the funds they need is to use invoice factoring or invoice financing. Both of these methods involve selling outstanding invoices at a discounted rate in order to receive payment immediately.

However, there are some key differences between the two options. Invoice factoring involves selling the entire invoice and turning over collections to the factor. In contrast, with invoice financing, the business retains control of collections and only sells a portion of the invoice.

As a result, businesses should carefully consider their needs before choosing between invoice factoring and invoice financing.

The greater your level of knowledge is, the easier time you will have funding your business venture in times of need. Read on further to discover the positives and negatives of each, as well as a collection of comparisons of the two.

What is Invoice Financing?

You may have also heard invoice financing also being called Invoice Discounting, and it refers to borrowing cash against your outstanding accounts receivable. Here, the lender a factoring company will give you a large portion of your unpaid invoices, as previously mentioned, roughly 80%, up front. This will be delivered to you in the form of a loan or credit line.

After your client has paid the invoice, you will make a repayment to the lender, which will total as the amount loaned with added fees and interest. With invoice financing your business will remain responsible for collecting outstanding money owed to you from clients.

Invoice Financing usually works best for business ventures with a need of a fast source of cash, and for those that also feel confident that they can collect the money owed to them by customers. If this does not sound right for your set of circumstances, fear not, as there are other solutions available to you.

Invoice financing example:

When a business sells products or services on credit, the buyer usually has to pay within 30 days. However, it can often take weeks or even months for the business to receive payment. This can cause cash flow problems, as the business may not have enough money on hand to cover expenses. Invoice financing can help to alleviate this issue. With invoice financing, businesses can sell their outstanding invoices to a lender in exchange for immediate payment.

The lender then collects the money from the buyer. This allows businesses to get the cash they need right away, without having to wait for payment. Invoice financing can be a helpful tool for businesses that need to manage their cash flow more efficiently.

What is Invoice Factoring? 

This is a form of invoice financing, but it has its own unique elements that make it stand apart from others you may be more aware of. Here, the factoring company will purchase your unpaid invoices from you and take control of the collection process. You will not need to chase up clients and customers for payments any longer if you utilise this method.

You will receive payment for a percentage of the total outstanding invoice amount upfront. After the full amount has been collected by the factor, they will advance you the difference, minus an agreed fee for their services. The key point to take away here is that your customers will deal with the factoring company when making payment, not you.

Invoice Factoring is normally best suited to businesses that have had outstanding accounts receivable between 60-90 days or longer. It is also highly useful for business ventures that don’t want to be burdened with recover outstanding invoice payments themselves and would prefer others to deal with it for them.

As you are pretty much getting two services in one here, you will often find Invoice Factoring to be more expensive than Invoice Financing. The factor is accepting there is a risk of your customers not paying full stop, so they typically charge more to counterbalance that issue.

Invoice Factoring vs Invoice Financing: The summary 

Differences

Invoice Financing

Invoice Factoring

Typical Initial Advance

80% of the invoice value

85% to 90% of the invoice value

Typical Fee

1% to 3% per month

2% to 4.5% per month

Who Owns the Invoice?

Your business

The factoring company

Who Collects on the Invoice?

Your business

The factoring company

Advantages of Invoice Financing and Factoring

Here are the advantages offered by Invoice Finance and Factoring funding solutions:

If you apply for a short-term business loan, the chances are you will have a tough time if your credit history isn’t up to scratch. In some cases, this can lead it to becoming impossible for you to gain finance. If this is the case for you, you can turn to Invoice Finance as a solution that will help you to improve cash flow and keep your company running smoothly.

Invoice Finance awards businesses with longer payment terms or late payment issues a fast injection of funds. As 100% of the value of your outstanding invoices will normally become available to you right away, you can get hold of the cash you are owed without having to wait around for customers and clients that have a habit of paying you late.

Next, whether you are utilising invoice factoring or invoice financing, it might be the only option available to you if you do not have access to other types of business financing. These lenders will be more interested in your invoices than your business’s financial health and your personal credit score, so you might find this type of financing easier to get your hands on than others.

A benefit that is unique to Invoice Factoring is that the headache of collecting late payments and chasing clients up from them is removed. This will be taken out of your hands and become someone else’s responsibility. This frees up more of your time to do other things that can take your business forward, as well as reducing the level of stress you feel on a day-to-day basis.

Furthermore, Invoice Finance funding methods are a great supporter of growth for any small to medium sized business. This is because when new invoices are received, more funding is made available to you. This is a highly adaptable form of finance that changes along with your business: when your sales grow, so will the amount of cash that is released through unpaid invoices.

More cash means higher opportunity for growth throughout your business venture, and you will normally receive funding within 24 hours after being accepted. When you borrow money here, it will be cash that you don’t have access to due to either late or failed customer payment, meaning this is a form of finance that can get your business back on track very quickly.

Help to quickly improve your cash flow

By utilising invoice finance, you can free up the cash that is currently tied in unpaid invoices and use it however you wish. This flexible funding option is great for small business ventures that need to get hold of cash which isn’t available to them due to late customer payments.

Invoice Finance is the perfect solution for business ventures that have been turned down by banks after applying, or that have a history of bad credit/financial troubles. If you need to improve cash flow, this is likely going to be a great method for you to utilise as trade finance.

Understanding the Difference Between Invoice Factoring and Invoice Financing

Read more: What are the Myths of invoice Factoring

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