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What is the difference between invoice financing and factoring?
With invoice financing you borrow against unpaid invoices and keep control of collecting from customers. With factoring you sell the invoices to a company that collects from your customers directly. Both release cash that would otherwise wait 30 to 90 days.
If your business does B2B work with long payment terms, you may be sitting on thousands of dollars in unpaid invoices while your own bills come due. Invoice financing and factoring turn those invoices into cash now instead of in 30, 60 or 90 days. They sound alike, but they work differently, and the difference affects your customers.
How each one works
In both cases, a lender advances a percentage of an invoice's value up front and pays the balance, less fees, when the customer pays. The difference is who deals with your customer: in factoring, the factor does.
- Invoice financing (also called accounts receivable financing): you borrow against your invoices and keep collecting from customers yourself. Your customer may never know.
- Factoring: you sell the invoices to a factor, which takes over collection. Customers are told to pay the factor directly.
A simple example
Say you invoice a customer $20,000 on 60-day terms. A lender advances a large part of that straight away, so you can pay staff and suppliers this week. When the customer pays in 60 days, the lender releases the remainder, minus its fee. You have not waited, but you have paid for the speed.
When it makes sense
- You sell to other businesses on 30 to 90 day terms
- Payroll and supplier bills are due before customers pay
- Your customers are reliable but slow
- You are growing quickly and need cash to fill larger orders
The approval often leans on the quality of your customers more than on your own credit history, which can help younger businesses with strong clients.
Things to compare
- Advance rate: the share of the invoice paid up front
- Fees: how they are charged and whether they rise the longer an invoice is outstanding
- Customer contact: whether your customers will know a third party is involved
- Contract length and any minimum volume
Alternatives
If invoices are not the main issue, a working capital loan or a line of credit may be simpler. If the real problem is slow collections, tightening your terms may fix it for free. Our cash flow guide covers practical ways to get paid faster.
