Invoice factoring or financing? Cash-strapped companies often find themselves in a dilemma when they hear two strikingly similar terms back-to-back. In a tight credit environment, businesses are turning to certain non-bank alternatives so they can run their businesses smoothly.
Of all the tools available, invoice factoring and invoice financing are considered the most effective. These financing methods are becoming more and more popular due to their simple nature. But companies must choose one to successfully proceed with their operations.
Let’s understand its meaning first…
Yes, they are different from each other. Invoice factoring differs from invoice financing in many ways.
In factoring, the commercial factoring company or lender purchases a company’s outstanding accounts receivable. The lender may factor the down payment between 70 and 90 percent at the time of purchase. The balance, less the factoring fee, is also released once the invoice payments are collected.
Under financing, the amount is secured by a pledge of those assets associated with the accounts receivable. A debt base of 70 to 90 is established with a control management fee of 1 to 2 percent.
Coming to their differences…
Flexibility – Although the amount received is more or less the same in both cases, factoring offers more flexibility than financing. In the case of the former, companies can choose which invoices to factor. In the latter, the financing company will choose which invoice to settle.
Collateral – Invoice financing requires companies to present all of their accounts receivable as collateral to the financing company. This is generally not the case with factoring.
Processing Fee: Financing is often cheaper than factoring. While only 1 to 2 percent of the outstanding amount is charged in the case of the former, it is 1 to 5 percent in the case of the latter.
Both have pros and cons. If you are a small business, factoring is the option to choose because some invoice financing companies require a minimum sales of $75k per month to qualify.
Both methods are a brilliant option to tackle your cash management problems. All you need to do is find the company that can finance you with the lowest processing costs. Factoring invoice companies can put an end to your cash-strapped situations. They act as an engine for sales and growth and prevent setbacks that could halt business operations. The key here is knowing when to get involved and when not to.