What is the difference between invoice financing vs invoice factoring
What’s the Difference Between Invoice Financing and Invoice Factoring?
Even as you read the two terms - invoice financing and invoice factoring, it might take you a second or two to realize that they are two different terms. In general, both are financing options that will help with cash flow and closing invoice balances. However, both are different processes.
What is invoice financing?
-
In this process, you use your outstanding invoice as a means to borrow funds and finance your business. So, the outstanding invoices are used as collateral and you can obtain a loan. Once the outstanding invoices are collected, you can pay back the lender, along with interest.
Pros of Invoice Financing
- Ownership and Control
It offers you a certain control over your business as there is reduced pressure and better cash flow, while you have the ownership of collecting invoices from your customers as well.
- Confidentiality
There are no third-party interactions in invoice financing, which means your customers will never be directly approached. So, this process remains confidential and you can protect your relationship with the customer while also getting the required cash flow.
- Flexible and Creditworthiness
Even startups or bad credit companies can easily qualify for invoice financing and these flexible requirements help you obtain a loan solely based on the value of your invoices and of course, the creditworthiness of your customers.
Cons of invoice financing
- Costs
Invoice financing companies charge higher fees than traditional loans from a bank, which will cost you more.
- Credit Dependency
While you still own the rights to collect money from your customers, this credit dependency is both time-consuming and could affect your business if someone fails to pay your invoices.
What is invoice factoring?
Invoice factoring is the sale of the outstanding invoices into the lending agency, a third party. The onus of collecting the unpaid cash you have recorded in your e-invoice billing software is transferred to them who pay you a certain part of the money immediately. Once the collection is done, you receive the outstanding invoice after the factoring agency takes their compensation.
Pros of Invoice Factoring
- Immediate Cash Flow
You don’t have to wait for the client to repay and can easily get access to immediate cash flow.
- Simplifies Collections
It is no longer your work to collect the outstanding money. It saves both time and effort.
- Accessible
You don’t need any collateral to be eligible for this process. Without even having an excellent credit history, invoice factoring is more accessible and easy to get approval.
- No New Debt
You are not placing your invoice to receive the money as a loan, but are selling it. Therefore, you are in no new debt.
Cons of Invoice Factoring
- Loss of Control
You no longer have control over the outstanding invoices or the ownership of collecting the amount from your customers in the invoice factoring process. So, you do not have any control over any interactions that happen.
- Costly
Like invoice financing, invoice factoring is also a costly process where you might have to pay fees that are somewhere between 1% - 5% of the total invoice amount.
- Customer Awareness
Customers are the king in any business and we need to maintain the relationship with our clients. However, with a third-party contract, it is difficult to ensure the relationship is maintained.
- Complex Contracts
What if your customer doesn’t repay the amount? The contracts here are quite complicated, and your business might become liable to repay the borrowed amount to the agency if your client doesn’t repay.
Final Thoughts
Invoice financing and invoice factoring have both pros and cons which might help your businesses with immediate cash flow but could sometimes hamper the business process. Irrespective of the financing option you choose, you need to use the best e-invoicing software to ensure all your invoices are properly maintained.
