Invoice Factoring Vs Financing: Understand the Difference

Invoice factoring or financing? Cash-strapped businesses often find themselves in dilemma when they hear two strikingly similar terms consecutively. In a tight credit environment, companies are turning to certain non-banking alternatives so that they can smoothly run their businesses.

Out of all the tools available, invoice factoring and invoice financing are considered to be the most effective. These financing methods are getting more popular due to their non-complex nature. But businesses need to pick one to proceed successfully with their operations.

Let’s understand their meaning first…

Yes, they are different from each other. Factoring of invoices differs to financing of invoices in many ways.

In factoring, the commercial factoring company or lender purchases a business’ outstanding receivables. The lender can factor the advance anywhere between 70 to 90 percent at the time of the purchase. The balance – less factoring fee – is also released once the payments of the invoices are collected.

Under financing, the amount is secured by a pledge of those assets associated with accounts receivables. A borrowing base of 70 to 90 is established with a control management fee of 1 to 2 percent.

Coming to their differences…

Flexibility – Although the amount received is more or less same in both the cases, factoring offers more flexibility than financing, In the former’s case, business can pick and choose which invoices to factor. In the latter, the financing company will choose which invoice to clear.

Collateral – Invoice financing requires companies to submit all of its accounts receivables as collateral to the financing company. This is generally not the case with factoring.

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Processing fee – Financing is usually cheaper than factoring. While only 1 to 2 percent is charged against the outstanding amount in case of former, it is 1 to 5 percent in case of the latter.

Both have their pros and cons. If you are a small business, factoring is the option you might have to go for because some invoice financing companies require a minimum of $75k sales a month to qualify.

Both these methods are a brilliant option to tackle your cash management issues. All you need to do is find the company which can fund you with the least processing charges. Factoring invoice companies can put a full stop to your cash crunch situations. They act like an engine of sales and growth and prevent hiccups that might halt business operations. The key here is to know when to get involved and when not to.