Invoice Factoring

Invoice Financing vs. Invoice Factoring: Pros & Cons

Accountant looking at invoices

Anyone who has tried to get a loan can tell you how tough it is out there. Banks have notoriously strict qualifications that make approval close to impossible for all but the most successful businesses. On top of that, small and medium-sized business (SMBs) are constantly struggling to get big companies to pay their bills on time.

These one-sided billing practices, also known as “net terms,” allow customers to pay for goods and services they’ve already received up to 30, 60, or even 90 days later. In fact, it is estimated that more than 60 percent of invoices are paid late. As businesses keep trying to get bolder and stretch these terms even further, SMBs are finding new, creative ways to deal with the crunch.

Invoice financing and invoice factoring are two types of alternative lending solutions that are helping small businesses get the money they deserve; when they need it. Both of these solutions are changing the game when it comes to working capital management for SMBs. Even so, it’s important to understand the differences between the two. Here is what you need to know about invoice financing and invoice factoring, and how you can choose which is right for your business.

What is Invoice Financing?

Invoice financing is a type of alternative lending where a business is advanced funds based on its outstanding invoices. With invoice financing, the invoice itself acts as collateral for the advance. This is great for SMBs because it eliminates the necessity for additional collateral and improves the odds of approval. SMBs simply supply their invoices, apply for financing, and are advanced up to 100 percent of the invoiced amount. Of course, things are never that simple. Here are some pros and cons of invoice financing that everyone should understand.

Pros of Invoice Financing

When working with invoice financing, there are many advantages that benefit small businesses. Among these are the convenience and accessibility afforded by online invoice financing platforms. Thanks to the ability to apply for financing online, the approval process is faster than ever. Oftentimes, businesses can receive funding in as little as 24 hours.

On top of its speed and accessibility, invoice financing also keeps small businesses in control. When it comes to invoice financing, the business is receiving an advance loan for the amount of the existing invoice. The small business is still in charge of tracking down payment. This can prove to be an advantage because it allows companies to keep extending net terms to their clients. As a result, SMBs can continue to enjoy positive business relationships without finding themselves stuck trying to bridge a cash-flow gap.

While they are waiting to receive payment, the SMB is charged a weekly fee (up to a maximum allowed amount). This can be convenient, and affordable, for businesses that are confident they can get paid in a timely manner. Unfortunately, this can also lead us to some of the cons of invoice financing.

Cons of Invoice Financing

The control a small business can continue to exercise over its invoices thanks to invoice financing is also something of a double-edged sword. Invoice financing might be a great way to get working capital fast, but it’s not necessarily going to save you time.

With invoice financing, the small business is still the one that has to track down payment. That means small businesses spending precious time and resources ensuring that the invoice gets paid. If the invoice isn’t paid, then it becomes difficult to pay back the advance. For every week that the invoice isn’t paid, fees will continue to accrue. If a client keeps dodging that outstanding invoice, these fees can quickly add up to a sizable amount, costing you more in the long run.

Is Invoice Financing or Invoice Factoring Better for Your Business?

Both invoice financing and invoice factoring are valuable ways in which small businesses can ensure that they get paid for their hard work. Which options work best for you really boils down to each unique business. If you’re the kind of business that appreciates being hands-on and doesn’t mind dealing with customers directly to get paid, then invoice financing may be your best option. On the other hand, if you’d rather get back to your job, as opposed to tracking down outstanding clients, it may make more sense for you to sell the invoice entirely and go with invoice factoring. Regardless of what you choose for your business, both are effective alternative lending solutions to help you get paid for your invoices now.