The main difference between the two is who collects the unpaid invoices of the business. In invoice financing, the customer owns the control of collections. In invoice factoring, accounts receivable factoring, the factoring company purchases the unpaid invoices and owns the collections. In both cases, an upfront of 80% of the unpaid invoices are advanced to businesses. Many small businesses are frustrated with their outstanding accounts receivables. According to a survey, more than 60% of the invoices are paid late by the customers, and 20% are over two weeks late. Getting late payments can put businesses cash flow squat, preventing business owners to pay for essential business expenses, or to leverage business opportunities.

If your business is facing cash flow problems, both these options are possible solutions to deal with it. However, both these options differ in many ways in regards to payment collection and structure of the financing. Here is an explanation of the likenesses and dissimilarities of both options, so you can make an intelligent decision before choosing them.

What is Invoice Financing?

Invoice financing also called invoice discounting involves borrowing money against a business outstanding accounts receivables. An invoice financing lender usually offers upfront a portion of your unpaid invoices in form of a business loan or credit line. Once you receive payment from the customers, you repay the borrowing amount plus fees and interest. In Invoice financing, business owner is accountable to collect outstanding money owed by the customers.

If your business has an automatic accounts receivable system, on payment from your customers, the lender can deduct their fees before forwarding you the balance. Invoice financing is quick fix for businesses that need fast cash and anticipate they can collect outstanding invoices from their customers.

What is Invoice Factoring?

Invoice factoring is similar to invoice financing but with a little twist. In this scenario, the factor company purchases the accounts receivables you’re owed and collect it from your clients. The lender will pay upfront a percentage of the total outstanding invoice amount and take the charge of collecting the full amount from your customers. After collecting the amount, they’ll advance you the difference, keeping an agreed-upon percentage as their fee for service.

This is a suitable option for businesses with outstanding accounts receivables of 60 to 90 days or longer periods, or for those who don’t want to recover outstanding receivables on their own. This option is more costly than invoice financing since you offload the collecting responsibility to the factoring company. The factoring company charge more by accepting the risk that your customer might not pay the invoice.

The Pros of Invoice Financing and Invoice Factoring

There are some pros to using these forms of business financing. These financing options help smooth the cash flow, allow you to pay wages, bills without having to wait for payment from your customers.

Also, invoice factoring or invoice financing are the only financing options available to you when you’re unable to secure other types of financing. Since these lenders focus more on your invoices and less on your business’s financial health and credit score.

The major benefit of invoice factoring is guarantee of collecting some of your outstanding accounts receivables and eliminates the hectic job of collections by yourself. If your business is facing late payments or unpaid invoices, invoice factoring is the option to secure so you can at least get some of what’s owed to you, allowing you to have the crucial to stay afloat.

Another benefit is the limited risk of not collecting outstanding payments. The risk is transfer to the factoring company who will collect the receivables and you have your cash instantly.

The Cons of Invoice Financing and Factoring

While these options seem like a quick solution to your cash flow issues, it can be costly, particularly since your fees will be conditional on when the customer off set the invoices. Usually, the factoring company charges a certain percentage of 1% to 4.5% every month for the services.

Moreover, choosing the factoring means you’ve entered into a factor agreement – indicating to customers that your business invoices are going to be managed and collected by a third party and its in danger. Luckily, you’ll find many factoring companies who want your continued business, so instead of presenting them as factors, they represent themselves as a representative of your business.

The Comparison of 6 Best Invoice Factoring Companies in 2019

 Factoring Companies

Discount
Rate

Expected
APR

Origination
Fee

Additional
Fees

Funding
Amount

Advance
Rate

Paragon Financial Group

1.25% to 2.5%

per 30 days

16% to 55%
or more depending on individual fees
Small, one-time fee No additional fees are typically charged $30,000 to $10 million
per month
80% to 90%

BlueVine 

0.25% to 1.35%
per week

13% to 70%

None

 $15 wire fee; automated clearing house (ACH) is free

$5,000 to $5 million
per month

85% to 90% with face
values of $500 or more

TCI Business Capital

1% to 4% per
invoice monthly

12% to 55% or more depending on individual fees

None

$12.95 ACH fee; $19.99 wire fee $50,000 to $20 million
per month

About 90% on B2B or business-to-government (B2G) customers due in 30 to 90 days

altLINE 

 

0.75% to 3.0% per invoice for up to 30 days

9% to 55% or more depending on individual fees $350 one-time fee $30 wire fee; no monthly minimum fees $30,000 to $5 million
per month

About 90%

Triumph Business Capital

1% to 4% per month

13% to 55% or more depending on individual fees Small, one-time fee Review is required Up to $20 million, with no stated minimum

About 90%

Payability

Daily invoices: Flat monthly rate starting at 1% to 2% of gross sales

Future invoices: Flat weekly fee starting as low as 0.75% of future receivables

 

None None Daily Invoices: No maximum; minimum advance is $100

Future Invoices: Typically from $3,000 to $250,000; larger limits may be considered with additional approval

 

For Daily Invoices:  80%

For Future Invoices:  80% or 85%

 

How to Select an Invoice Financing Solution?

While both these options have similarities, which one is a better option is based on certain situations. Before choosing an option, consider the following pointers:

  • Notification VS Non-Notification

In invoice factoring scenario, your customers are notified since the factor will be collecting payments on your behalf. In invoice discounting scenario, you are collecting payment, and your customers will not be notified of a third party involvement.

  • Collecting Payments

For small business, it might be hard to collect payments. Choosing invoice factoring is the best option to have your unpaid invoices collected.

  • Asset-Backed Line Of Credit VS Lump Sum

In Invoice factoring or invoice discounting scenario, businesses receive a lump sum payment up to 95% of the unpaid invoice value upfront. For a more flexible option, secure invoice financing to receive a line of credit that is backed by your unpaid invoices.

Alternatives to Invoice Factoring Solution

If invoice factoring or financing is not a perfect fit for your small business needs, there are many alternatives to it. Below listed are the best alternatives to invoice factoring:

  • Fast Business Loans:Get access to short-term financing with a fast business loan in as quick as one to three business days. You’ll typically pay a high-interest rate as a trade-off for the speedy funding.
  • Working Capital Loans:Get quick working capital loans in a matter of days to pay for operational expenses, buy inventory, or cover payroll.
  • Business Line of Credit:Get a small business line of credit, draw against a pre-established credit limit, and only pay interest on the amount advanced.
  • Business Credit Card:If your small business have little cash flow issues, and want to earn reward, secure a business credit card.
  • SBA CAPLines:With the SBA CAPLine program, get cash up to $5 million in short-term and recurring working capital financing.

The Conclusion

If unpaid invoices are putting your small business into risk, get help from accounts receivable financing. With invoice factoring and financing, you can get the needed money even when you don’t qualify for a bank loan. Stay focused and consider different financing option, compare their rates and fees, and choose a lender based on your business financial needs.

Small Business Financing News │ Merchant Advisors | blog
The Difference between Invoice Financing and Invoice Factoring
The Difference between Invoice Financing and Invoice Factoring
Looking for funding to fund your small business? The road ahead is full of twists and turns because it does require a lot of time and research to locate the best funding program that suits your business. Due to theRead more
Discover the differences between invoice financing and invoice financing, along with best factoring companies to fund your small business.
MichaelGavin
Merchant Advisors
Merchant Advisors
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