What is the difference between invoice financing and factoring?

Wednesday 12th January 2022

Invoice financing sets forth a way for many businesses to boost their cashflows and balance their finances more efficiently. As a financial solution, it’s becoming more and more popular for growing and established businesses who want to take the weight of unpaid invoices off their shoulders.

A common question many ask regarding invoice financing is the following: what is the difference between invoice financing and factoring? Since both occupy similar fields in the world of financing, it’s an excellent question, and in this blog, we’re going to give a quick rundown of the difference between financing and factoring.

In this article:

  • What is invoice financing?
  • What is invoice factoring?
  • Advantages of invoice financing and factoring
  • Disadvantages of invoice financing and factoring

Invoice financing

Invoice financing is a service offered by financial solutions providers to improve cash flow in businesses that are suffering from unpaid invoices.

How it works:

  1. Your provider give you a proportion of your outstanding invoices of up to 90%.
  2. The money is normally in your account around 24-48 hours as soon as the invoices are totalled up, granting you the funds without you needing to wait for the invoice to be paid.
  3. Once the invoice is paid in full by the buyer, you’ll pay back the amount you received from your provider, plus any services fee or interest accrued according to your agreement.

In this model, unlike invoice factoring, you are responsible for collecting the invoice from your buyer. You’ll still need to chase any unpaid invoices on your own terms. Generally, this results in less money spent on the financing service, but you’ll have to devote resources to collecting the invoice money.

Find out how much invoice finance would cost your business using our calculator

Invoice finance calculator

Invoice factoring

Invoice factoring (also referred to as debt factoring) is actually still a kind of invoice financing and shares many of the same basics. Like invoice financing, factoring sees your provider give you a proportion of up to 90% of your outstanding invoice monies, approximately 24-48 hours after the invoice has been written up. Your cash is still released earlier and your cash flow is still boosted. You’ll still pay back the provider once the invoice has been paid and you’ll still pay services fees and interest.

The key difference here is that with invoice factoring, your finance provider is responsible for collecting the invoice from your buyer. In this model, the provider buys the accounts receivables and follows up on the invoices on your behalf - your buyers will deal directly with the provider instead of you. This service can cost a little more, but for many businesses, the benefit outweighs the cost – where you’ll have to pay a little more, you won’t have to engage in the often-times arduous task of following up on unpaid invoices.

Advantages of invoice financing and factoring

  • It is an ideal way to raise finance for a business that has a high cost of sales or is seasonal in its operations
  • It is quicker to arrange than a traditional business loan.
  • It can be a less risky form of finance as it is based on the value of your sales ledger rather than a bank loan which may include risking personal assets.
  • It is a form of financing that allows businesses to speed up access to money that it is owed from customers without having to wait for invoices to be paid. A benefit of this can be that any investment or growth decisions can be met earlier and any issues around cash flow shortage, in particular when managing ongoing business operations, can be avoided.
  • A business can ensure it receives a steady flow of cash at the right time without needing to enter into long term committed contracts.
  • It can allow a business to stay in control of its cash flow by only accessing funds when it needs to and allowing it to improve turnover and profits.
  • It can be helpful in converting any sales made on credit into cash.

Disadvantages of invoice financing and factoring

  • Invoice financing is generally only offered to businesses with commercial clients as they are less risky so may not be available for businesses that deal mainly with the general public.
  • Invoice factoring requires handing over details of customers to a factoring company. This may have an impact on a business's customer relations, the factoring company's main interest is in getting invoices paid not maintaining customer relations.
  • Any invoice disputes or non payment by customers will require the business to pay part if not all of the outstanding debt to the finance company.

Want to learn more about how an invoice finance facility can boost your businesses cash flow? Get in touch

Get a quote Call us

Back to top