Editor's choice: Fundbox
- Loans up to $100,000
- No personal credit check
- Funds as early as 1 business day
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When your business is in a cash flow squeeze and you can’t get a bank loan, you may want to consider two valuable sources of funding: invoice financing and invoice factoring. Not only can these provide on-demand or ongoing sources of funding, they may also come with credit management services that can help you collect payments from customers
But what exactly is the difference between invoice financing and invoice factoring? In many ways they are very similar, yet they differ on some very important features.
If your business offers extended credit terms to customers (between 30 and 90 days), invoice financing allows you to use your invoices as financial proof that you can pay the lender back on an advance. You can usually get up to 85% of your invoice upfront from the lender and then once your customer pays the invoice, you’ll pay the lender back. This prevents you from having to wait to get your money, which is important if you need working capital.
Invoice factoring is similar to invoice financing in that you still receive up to 85% of the invoice upfront from the lender. However, in contrast to invoice financing, invoice factoring involves actually selling your invoices to a third-party. Invoice factoring companies will collect the full amount of the invoice from the customer on your behalf.
What is invoice factoring?
|Invoice financing||Invoice factoring|
|Invoice payment flexibility||More flexibility. You get to pick and choose which invoices to finance and when.||Less flexibility. Invoice amounts are typically advanced in the order received.|
|Cost||Monthly rate (usually between 3 and 5% that depends on the amount of your invoices.||High fees (as much as 15% of invoice amount) for selling a single invoice, lower fees for long-term commitments.|
|Retrieving payment||Your business usually deals directly with the customer for repayments.||The factoring company will usually have a debt collection service retrieve payments on your behalf.|
|Confidentiality||Private. Customers typically won’t know you are using a financing company.||Less privacy. Customers will be aware you are using a factoring company when contacted about payment from the third-party.|
Keep in mind the following differences when deciding between invoice factoring and invoice financing:
Because of the flexibility and credit management services, invoice financing is popular among smaller businesses. At the same time, invoice factoring is usually better suited to larger companies that have in-house collection services.
However, it ultimately comes down to your particular situation. You can ask yourself the following three questions to help decide what’s best for your business:
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