Major Differences between Invoice Financing and Invoice Factoring

By Per Frennbro in Financing

Is your small business in need of continuous cash flow but you are having problems in getting a bank loan? Then you may want to put your hands on these two important sources of funding: invoice factoring and invoice financing. They can provide you with ongoing or on-demand sources of funding along with credit management services, helping you collect payments from your customers. Now, you may ask, “What is the difference between invoice factoring and invoice financing?” Well, they are quite similar in many ways, but there are some important features in which they differ from each other.

In order to start with the differences they have, first, let’s make you understand what invoice financing and invoice factoring are.

Invoice Financing

Do your small business offers extended terms of credit to your customers? It can be for 30, 60 or 90 days at most. With invoice financing, you get to use your invoices as a financial proof that you have the ability to pay the lender back on an advance. In most cases, it is up to 80% of your invoice upfront that you are eligible to get from your lender. You can pay the lender back once your customers pay the invoice. Our BETALD platform is different from others. Here you get to finance up to 99% of the value of the invoice. Isn’t it amazing? With invoice financing, you don’t have to wait for the money that you need as your working capital, which is no doubt great.

Invoice Factoring

Just like invoice financing, invoice factoring lets you get up to 85% of your invoice value from the lender. This process actually involves selling your invoices to a third-party, which is unlike invoice financing. In this case, the full amount of the invoice will be collected from your customers by the factoring company on your behalf.

Here’s the difference between the two:

  • Privacy

In case of invoice financing service, confidentiality is maintained. This means your customers will not get to know that you are using a financing company to collect invoice payments. On the other hand, if you go for invoice factoring, your customers will get notified that their invoices will be managed as well as collected by a third party.

  • Payment flexibility

With invoice financing, you get to choose which invoices you want to finance. But the case is not the same with invoice factoring. With invoice factoring, you may need to finance all or most of your invoices at the maximum funding rate that is possible.

  • Debt management services

Debt collection services may or may not be offered by invoice financing. If you are a small business and you are opting for invoice financing service, then chances are that you already have credit and debt management departments. On the contrary, companies that offer invoice factoring services almost always come with debt collection or management services.

  • Funding

You can take invoice factoring as a line of credit that is linked to your account receivables. This is because, if you go for invoice factoring, you may need to finance all your invoices. This also means that you will always have an ongoing source of funding in hand. However, the case is different with invoice financing. Here, you can have on-demand funding. This means you can select the invoices you want to finance when you actually need it.

Are you having problems paying your suppliers? Is the interruption in your cash flow preventing you from fulfilling your customers’ orders? Then invoice financing is definitely a good option. Invoice factoring, on the other hand, is good for larger companies.

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