Invoice factoring vs. invoice financing.
Invoice factoring and invoice financing are similar and often used interchangeably. Compare the two methods to make sure your business is invoicing clients correctly.
Businesses may choose to use invoice factoring or invoice financing to speed up cash flow. Instead of applying for a loan, companies can reach out to third parties to get invoices paid faster.
What does invoice factoring mean?
Invoice factoring (or accounts receivable factoring) involves the sale of unpaid invoices to another company. The companies that buy unpaid invoices are also known as lenders, factors, or factoring companies.
If you’re a business owner, you may sell your unpaid invoices to a factoring company to increase your cash flow. You’ll receive an upfront payment for those invoices from the factoring company, but they’ll keep a percentage of the invoice totals — meaning your clients then owe their unpaid total to the factoring company, instead of to you.
When to use invoice financing.
Both invoice financing and factoring let business owners collect invoice payments upfront without having to wait to receive payment from a client. However, unlike invoice factoring, invoice financing creates a relationship between the business and the lender (instead of between the lender and the client).
To finance invoices, business owners can borrow money from a lender using client invoices as collateral. The lender will then “front” the business a percentage of the invoice totals, which the business will then repay by a certain deadline. Within that time period, the business should have received invoice payments from their clients.
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