Invoice Financing vs. Factoring: Which One Is Better?

Couple discussing with bank officerInvoices only have real value when they become liquid. Until then, they’re just assets you can’t use for up to three months—or more.

If you can’t wait for your debtors to pay up, you can either use your invoices as collateral to loan money from a third party or sell them at a discount. The former is called invoice financing, while the latter is invoice factoring. Apart from freeing up working capital immediately, either of the financial arrangements allows you to transfer the default risk associated with your receivables to another party.

Fundamentally, it’s easy to see how invoice financing and factoring are different, but they’re more dissimilar on closer inspection. Pay extra attention to these four things when deciding between the two:

Flexibility

By and large, invoice financing offers more flexibility. You can choose which receivables to finance and when providing you on-demand funding when desired. In online invoice factoring, on the other hand, the payments are advanced depending on the order received. Plus, you might be required to include most, if not all, of your receivables.

Cost

Considering the greater amount of risk the third party has to shoulder in invoice factoring, the fees can be high. But then again, the financing company might charge you a slightly bigger cost if your invoices are old or owed by less valuable organizations or individuals.

Payment Retrieval

Financing companies observe different payment retrieval strategies, but they usually minimize the level of contact as much as possible. On the other hand, factoring firms come with debt management services nine times out of 10.

Confidentiality

If privacy is your top priority, invoice financing is the safer route to go. In most cases, your customers or suppliers wouldn’t know that you’re using a financing company for their unpaid bills. In contrary, the factoring company will directly contact the debtors, or else it will lose its money in case of default.

Either of these financial transactions can improve your cash flow but might also affect your customer relationships. Know what you’re getting into before deciding to avoid unpleasant surprises.