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(844) 860-2288
(844) 860-2288
The difference between invoice financing vs. invoice factoring is who collects on the unpaid invoice. With invoice financing, you have the ability to pledge the invoice as collateral. You are faced with collecting the invoice from your customer. With invoice factoring, you sell your invoice entirely losing control of collecting it. You leave the unpaid invoice to the lender.
Both of these products provide an advance anywhere from 80-90%, at times the advance could reach 100% upfront. When the invoice is collected, you receive the remaining amount or the spread discounting the fees. Also, discounting the interest on the advance part of the calculation. These products are similar in nature and offer great benefits to business owners in need of working capital. The need for capital is essential when the businesses main source of revenue comes from paid invoices.
Owners know that over 55% of invoices are paid late. Businesses prepare for this and stretch out their cash flow as much as possible. There is always one or two large invoices that come in much later. When that occurs, business owners describe it as a “disaster”. The future plans are placed aside. Owners start to prioritize between if they should pay their vendor first or cover payroll. Such decisions are not easy and owners shouldn’t face such difficult question. As soon as you are in that position you can forget about chasing other work or opportunities. Working capital makes your life easier and any major source of financing should be an essential part of your business.
With invoice financing you are borrowing funds while the lender holds the invoice as collateral. You are responsible to collect the payment for the invoice and repay the advance back. With invoice financing, you are in full control over your customer.
As an example, let’s say your business is ABC Construction and you have an unpaid invoice for $10,000. The terms of the invoice are Net 30, so the customer has one month to pay you. If you need the cash fast, you pledge that invoice as collateral with a lender. You would receive an advance of 80% or $8,000 up front. In a month or less, you collect the full payment from the customer and repay the advance. If the financing company receives 3%, you would have to send the lender back $8,240. Some lenders structure this differently depending on the terms and their fees.
With invoice factoring you are selling your unpaid invoice to the lender or the factoring company. You are no longer responsible of collecting the invoice and lose control over your customer along with your privacy.
The main difference between invoice financing vs. invoice factoring is that you have full control of the costumer and you do not sell your invoice. You are responsible of collecting the payment. With invoice factoring you lose your control and sell the invoice while the factoring company must collect the payment from the customer. The main disadvantage between both is that you lose full control with invoice factoring. When you sell the invoice, your customer would receive a “notice of assignment”. A document that outlines that the factoring company is the one that would be collecting the payment and not your business.
Business owners think twice about invoice factoring because of the notice of assignment and your customer knowing that you have sold their invoice. You lose your privacy as a business and some customers question your financial situation more than before. This is the sole reason why business owners prefer invoice financing vs. invoice factoring.
Besides your customer knowing about your financing situation, the lenders would also verify the invoice majority of the time. They would call your customers to verify the terms and amount on the invoice. At times they would ask for additional documents such as an original agreement or contract if they are not satisfied with a verbal call. As soon as your customers questions your financial position, they tend to think about the worst-case scenario. At Creditfy, we believe that your financial structure and position should remain private and confidential from your customers at all times. We believe that it’s none of their business! As a business owner, you must keep business affairs private.
The funds that you receive from invoice financing or factoring could be used for any business expense. Businesses are free to use the capital as they see fit as long as it provides a benefit or is for the business use. Business owners use the funds to fuel their cash flow with positive working capital. One of the biggest expenditures that owners use the funds for are covering payroll expense, covering short-term liabilities such as debt payments on other financing, rent, taxes, equipment rental or marketing.
Many businesses owners pledge or sell their invoice in order to undertake additional work or contracts and cover the expenses associated with it. Owners that don’t have the freedom of obtaining funds quickly do not take additional work and miss out on work opportunities.
When choosing the best financing option its essential to understand what each product offers. Many business owners prefer invoice financing versus factoring because of privacy and having control of collecting the invoice. Both products are similar in nature and offer same benefits. As a business owner, you need to make a decision if you want to retain control over your customer or have the lending company take the relationship.
When comparing both sources, it’s clear that majority of business owners want to remain in control. They want privacy over their customer and keep their financial affairs private. At Creditfy, we use technology that helps us provide fast funding regardless if you choose invoice financing or invoice factoring. Regardless of your revenue or credit, we provide funds to businesses with poor credit or cash flow. Creditfy can provide an approval within the same day of applying and funds within 24-48 hours. It all depends on how quickly you provide us with your invoices. Apply when you’re ready!