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Invoice Factoring vs Invoice Financing: Everything You Need to Know (2024 Guide)

What is Invoice Factoring

In invoice factoring, a business sells its outstanding invoices to a third party (also known as a factoring company) for immediate cash flow. The factoring company gets full control over the invoices and deals with the customers to receive the full payment.

Since the factoring company interacts with the customers, it does not remain a confidential procedure.

What is Invoice Financing

In invoice financing, a third party (also known as a factoring company) lends money to a business against its unpaid invoices but does not buy them. The business does not lose control over its invoices since it’s a private agreement between both parties.
The business receives all the payable invoices from its customers, and the factoring company doesn’t interfere in this matter.

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Key Distinctions Between Invoice Factoring and Invoice Finance

Factors Invoice Financing Invoice Factoring

Ownership of Invoices

The business borrows against invoices and retains ownership.

The business sells invoices and transfers ownership to the factoring company.

Receiving the pending invoices

The business collects the payable finances itself.
The factoring company takes over this responsibility.

Percentage fee

Lower fees (3-5% of invoice value).
Higher fees (8- 15% of invoice value).

Business privacy

Yes, customers are unaware of the agreement.
No, the factoring company interacts with customers. So, they become aware.

Choosing specific invoices

Yes, a business can select which invoices to finance.
No, a factoring company usually buys invoices in bulk.

Length of contract

Usually short-term, room for flexibility.
Usually long-term, less room for flexibility.

Understanding Invoice Financing & Invoice Factoring

We want you to make better financial decisions for your business. To do that, you need to understand the procedures for invoice factoring and invoice financing. We have compiled some examples for you to better understand both.

Understanding Invoice Financing & Invoice Factoring

Imagine a software development company in the UK dealing with a cash disruption issue. They’ve recently completed a major project, resulting in an invoice of £50,000 due in 60 days. However, they cannot wait for 60 days to receive the money because they need to start a new project immediately.

By going for invoice financing, they use the payable invoice as collateral to borrow £45,000, which is 90% of the invoice’s value. When their client eventually pays the invoice, the company receives the remaining amount, minus a 3% fee.
They solved the cash flow problem with flexibility while maintaining a good relationship with their client.

A scenario for invoice factoring

A construction firm in the UK is in immediate need of cash to purchase materials for an upcoming project. They have £50,000 in outstanding bills from various clients and have decided to use invoice factoring to manage their financing issues. They sell these invoices to a factoring company, which agrees to pay them an advance sum representing 85% of the invoice value. This amounts to £42,500.

After the factoring company successfully collects the payments from the clients, they deduct an 8% fee from the total invoice amount. Therefore, after collecting the invoices, the factoring company sends the remaining balance to the firm.
Notice how the fee is higher in this case, but the firm benefited from the instant funds and avoided the hassle of collecting payments from different clients too.

Choosing the Best Financial Option for Your Business

You might be wondering, between invoice financing and factoring, which is the more suitable financial solution for my company? Well, this is not a black-and-white decision since these two options are not opposite to each other. It’s a financial decision where you understand your business needs and choose accordingly.

  • For a business that mainly deals with a few long-term clients at a time, invoice financing might be a better choice. This is because it lets the business borrow money using its unpaid invoices without giving them up. On the other hand, invoice factoring could work better for businesses that have many different clients. It helps them get cash fast by selling their invoices, and they don’t have to chase payments across several clients since the factoring company will do it for them.
  • If you want control over your payable accounts, then go for invoice financing. In the case of invoice factoring, the factoring company will interact with your customers to receive the unpaid bills.
  • If you are just starting your business or have a bad credit score, factoring might be an option for you. However, if your customers have a reliable credit history, you can choose to invoice your bills.

Explore Top Invoice Factoring and Financing Options In The UK With ComparedBusiness

ComparedBusiness can help you secure invoice financing or invoice factoring from the top vendors in the UK. Just submit your requirements in less than 2-mins and we will match you with the top lenders in the UK. You can pick and choose the best option as per your business requirements.

FAQs

Invoice factoring means you sell your invoices to a company that collects payments from your customers. With invoice financing, you keep your invoices and borrow money against them, so your customers don’t know about the agreement. In invoice financing, you are responsible for collecting customer payments.

Invoice financing is better for keeping a good relationship because your customers won’t know about it. You still collect payments directly from them. With invoice factoring, the factoring company collects from your customers, which they might notice. 

However, that doesn’t mean going for invoice factoring will tarnish your relationship with your customers. You can work with a factoring company that treats your customers with respect and maintains your business image.

Invoice financing usually has lower fees (3-5% of the invoice value). Invoice factoring tends to have higher fees (8-15% of the invoice value) because the factoring company collects the payments and takes on more risk.

A business might choose invoice factoring if it needs cash quickly and doesn’t want to handle collecting payments from many different customers. Factoring can be especially helpful for new businesses or those with poor credit scores.

Written by:

Henry Baker
Henry Baker
Henry Baker, an adept financial & business copywriter in England, boasts a decade-long career collaborating with top-tier UK financial institutions. Renowned for his skill in translating intricate finance into captivating content, he's a trusted authority in simplifying complex concepts for diverse audiences.

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