Businesses looking to raise cash have a few options they could consider. They might borrow from a bank in the form of a bank loan or try to access funds through a peer-to-peer lending marketplace. Some business owners will even put more of their own money into the business if they are running low on cashflow. But there are other options too. The experts at Thales Financial say that business owners can try to raise cash quickly by considering invoice financing or through factoring their invoices. But what is the difference between the two, and what are the benefits for the business?
What is Invoice Financing?
Invoice financing means borrowing short term from a finance company and using your unpaid invoices as collateral. In most cases, a business can borrow up to 90% of the value of the invoice. Once it is paid by the customer, this must be paid back to the finance company along with the relevant fees (which could be between 1% and 5% of the value of the invoice). The business owner is responsible for collecting the payment of the invoice from the customer.
What is Invoice Factoring?
With invoice factoring, a business is essentially ‘selling’ its unpaid invoices to a factoring company. The factoring company will pay the business most or all the amount due on the invoice and will then take responsibility for collecting the amount from the customer. The factoring company will charge the business a fee for this service, which will usually be a percentage of the invoice value. If the company has initially paid between 80% and 90% of the invoice value to the business owner, it will send the remaining amount (minus fees) once the customer has settled the invoice.
What are the Benefits of Invoice Financing and Factoring?
Although slightly different in terms of how the money is collected from the customer, both invoice financing and invoice factoring have benefits for a business owner. They are an ideal way to access cash quickly for those companies that deal with other businesses and are struggling with cashflow issues. Furthermore, when compared to other ways of raising funding, both invoice factoring and invoice funding are quick and may be easier to qualify for.
As the finance company checks on the creditworthiness of a business’s customers rather than the business itself, invoice factoring and financing can be used by new businesses without much of a credit history or those that are considered to have a poor credit history.
How to Choose Between Invoice Factoring and Invoice Financing
For business owners that do not want to upset their customers by passing their invoice on to a third party, invoice financing may be the best choice because the customer need never know. However, if you have a new business and want to avoid the hassle of chasing payments from customers, invoice factoring could be the best way to raise the cash you need.
Conclusion
Although often confused with one another, there is a difference between invoice factoring and invoice financing. While they both allow businesses to access cash quickly, invoice factoring is the practice of selling unpaid invoices to a third-party company, but invoice financing is a method of borrowing money using the customer invoices as collateral.
Finance companies that offer both invoice factoring and invoice financing as lending options for customers will typically charge a fee, which tends to be a percentage of the invoice. With factoring, the finance company takes over responsibility for collecting the payment from the customer; with financing, this responsibility remains with the business owner.
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