Differences Between Invoice Financing vs Invoice Factoring

November 5, 2020

Late payments can cause great stress, especially for small business owners. If you’ve faced this before, you’d know that late payments can prevent you from paying your employees, making rent and even cause you to miss out on important business opportunities.

There are a few solutions that can help you with slow cash slow and for the purpose of this article, we’ll be focusing on invoice financing and invoice factoring. We’ll cover the basics, as well as the pros and cons of both options so that you can decide which one is more suitable for your business.

Invoice Financing vs Invoice Factoring: What’s the Difference?

The main difference between the two is who collects the businesses’ unpaid invoices. For invoice financing, you would be the one who retains full control of collections while for invoice factoring, the factoring company would be the one who purchases the unpaid invoices and takes over collections.

A stressed woman bites her pencil while looking at her laptop

Invoice Financing

For invoice financing, a lender pays you a portion of your unpaid invoices (usually 80-90%) upfront in the form of a loan or line of credit. Once you receive the invoice from your client, you’ll pay the lender the loan amount plus additional fees and interest. Your business is still the one responsible for making sure that your client pays the amount owed to you.

Businesses who use invoice financing are those that need the money quickly and are confident that they are able to collect the outstanding amount owed to them by their clients.

Invoice Factoring

For invoice factoring, the lender will pay you a percentage of the total outstanding invoice amount upfront and then take over the responsibility of collecting the full amount from your client. Once they collect the full amount, they will return to you the difference while keeping an agreed-upon percentage for their service. Your client will deal with invoice factoring company directly instead of you.

Invoice factoring is typically more expensive than invoice financing as the factoring company accepts the risk that your client might not pay up so they’ll charge more. This option is more suitable for businesses with outstanding invoices for more than a few months or for those who do not want to recover the owed amount from their clients on their own.

Advantages of Invoice Financing and Factoring

The benefit of using these options are:

1. It can smooth out cash flows very quickly while ensuring that you can pay your staff and regular bills on time.

2. It is also easier for you to apply compared to other types of business financing as the lenders focus more on your invoices rather than your business’ financial health and credit.

For invoice factoring, in particular, the other benefit is that it removes the stress of having to collect payments from your clients and gives you the cash necessary to keep your business afloat. The factoring company is the one taking over the risk of your clients not paying so it can give you peace of mind to focus on other aspects of running your company.

Disadvantages of Invoice Financing and Factoring

As mentioned, the downside of invoice financing and factoring are the fees involved as it will be taking a cut out of your company’s profits. Additionally for invoice factoring, allowing the lender to collect directly from your clients might signal the fact that your business is in trouble. The good news is that most factoring companies will try to keep things as discreet as possible and portray themselves as a representative of your team so that your clients will be none the wiser.

Invoice Factoring in Singapore

Invoice factoring is simple in Singapore due to the availability of online factoring companies. These companies carry out the processes online which reduces the hassle you have to go through compared to traditional financial services. You can easily apply through their website and wait a few business days for your invoices to be approved.

Should You Consider Invoice Factoring or Financing for Your Business?

While dealing with late payments can be frustrating for a lot of business owners, it helps to develop a good relationship with your client, preferably with a particular person, and agree on payment terms in advance so you can better manage your cash flow. There are also other methods such as offering discounts for customers who pay early and using online payment systems to make it easier for clients to pay. Try these tactics first and if they don’t work, then it would be a good idea to consider invoice financing or invoice factoring to smooth out your cash flow issues.

Ready to get started?
Aspire makes business finance easier - expense management, invoicing, FX, employee claims and more. This is the all-in-one finance OS for your business
Try it out today >>
Get high quality finance and entrepreneurial resources in your inbox.
Subscribe to the newsletter >>

Get high quality finance and business content in your inbox

Get insights and resources on building & managing your finance team, your finance tech stack and growing your business
Cheers! We'll share our best articles with you shortly. See you around!
Seems like something went wrong. Could you try again?

Explore the all-in-one finance solution built for finance teams

Save time and money with borderless payments, corporate cards, expense management, and more