What is the Difference Between Invoice Financing and Factoring?

Most businesses find themselves dealing with the occasional financial hiccup. But when delayed invoice payments result in major cash flow issues on a regular basis, it can have a major impact on overall business performance.

It is not uncommon for invoices to go unsettled for weeks or months, where important and loyal customers are concerned. You want to give them the flexibility they need to pay at their convenience and demonstrate trust, but you also need to get paid as promptly as possible.

This is where invoice financing and invoice factoring can help. Two similar products with one important difference, which provide businesses with the opportunity to access up to 90% of outstanding invoice values ahead of time.

What is Invoice Financing?

With invoice financing, the outstanding invoices can be converted into a quick and affordable cash injection. There are no specific limitations placed on loan sizes, as it depends entirely on the value of the invoices used as ‘security’ for the loan.

Most lenders cap their maximum LTV’s at 90% and the funds raised can be transferred into the specified bank account in just 24 hours. This makes invoice financing ideal for covering time-critical costs, where most conventional loans and overdraft products would take too long to organise.

The full loan balance (complete with agreed interest and fees) is then repaid at a later date, when the invoice has been settled by the client. In the meantime, the business retains full control over the customer’s outstanding debt and is responsible for ensuring they get repaid in full and on time.

What is Invoice Factoring?

Invoice factoring works in exactly the same way as invoice financing, in terms of the basic mechanics of the loan. A business can borrow up to 90% against the value of one or more outstanding invoices, in the form of a cash loan that can be organised and accessed in as little as 24 hours.

Lending policies and most other terms and conditions are also the same and the money borrowed can be used for any legal purpose.

The difference between invoice financing and invoice factoring lies in the approach taken to chasing up the outstanding debt from the customer (i.e. ensuring the invoice issued is settled in a timely manner). With invoice financing, the business is responsible for chasing up the debt. With invoice factoring, the debt is effectively sold to the provider, who then chases up the client to ensure the debt is settled.

For this service, interest rates and borrowing costs tend to be significantly higher.

Which is the Right Option?

For most businesses, invoice financing is the preferred option. It is rarely the first choice for a business to transfer outstanding invoices to a third party, and to have them chase payments from customers on their behalf.

This is something that could technically lead to trust issues with valued customers, and have a knock-on effect on customer relationships.

Where a business has good relationships with its customers and would like to preserve them long-term, invoice financing is always the better option. But in instances where a one-off customer has proved to be unreliable and irresponsible, chasing up the debt with invoice factoring could be the way to go.

This is where an initial consultation with an experienced commercial finance broker can prove invaluable. Your preferences and requirements will be discussed in full, after which the appropriate product can be organised for your business.

For more information on any of the above or to discuss the benefits of invoice financing in more detail, call today for an obligation-free consultation with a member of our team.