The Difference Between Invoice Financing And Invoice Factoring

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THE DIFFERENCE BETWEEN INVOICE FINANCING AND
INVOICE FACTORING
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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.
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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.
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Invoice factoring is similar to invoice financing
but with a little twist. In this scenario, the
factor company purchases the accounts receivables
youre 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, theyll 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 dont 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.
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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 youre unable to secure
other types of financing. Since these lenders
focus more on your invoices and less on your
businesss 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 whats 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.
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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 youve 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, youll
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 Cons of Invoice Financing Factoring
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The Comparison of 6 Best Invoice Factoring
Companies in 2019
Factoring Companies DiscountRate ExpectedAPR OriginationFee AdditionalFees FundingAmount AdvanceRate
Paragon Financial Group 1.25 to 2.5 per 30 days 16 to 55or more depending on individual fees Small, one-time fee No additional fees are typically charged 30,000 to 10 millionper month 80 to 90
BlueVine  0.25 to 1.35per week 13 to 70 None  15 wire fee automated clearing house (ACH) is free 5,000 to 5 millionper month 85 to 90 with facevalues of 500 or more
TCI Business Capital 1 to 4 perinvoice monthly 12 to 55 or more depending on individual fees None 12.95 ACH fee 19.99 wire fee 50,000 to 20 millionper 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 millionper 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
The Cons of Invoice Financing Factoring
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• 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.

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Fast Business Loans Get access to short-term
financing with a fast business loan in as quick
as one to three business days. Youll 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.
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