Are you wondering how invoice financing differs from invoice factoring? It’s easy to get confused because the two types of financing are very similar at first glance. However, there are some important differences you should understand before making your financing decision. Here’s a closer look at the similarities and differences to help you make the right choice.
How Invoice Financing and Factoring Are the Same
Both invoice financing and factoring advance your business money based on the value of its outstanding invoices. In both cases, the factoring or financing company charges a fee for this service. However, that’s pretty much where the similarities end.
How Invoice Financing and Factoring Differ
How much do you get?
When working with a typical factoring company, you’ll receive a percentage of the total value of your invoices—typically about 85 percent. The factor holds the rest of the invoice’s value in reserve until your customer or client pays the invoice.
When you use invoice financing from Fundbox, however, you’ll get the full value of your invoice—100 percent—right away. There’s no waiting until a dawdling customer pays up.
How fast do you get it?
Both invoice financing and factoring are faster than traditional bank loans with their lengthy approval processes. However, there are significant differences between factoring and invoice financing. With factoring, you’ll typically wait a week or two to get the money you need. With invoice financing, you can get it in as little as two or three days.
How much does it cost?
Remember the 15 percent of your invoice value that the factoring company holds on to? Once your client pays the invoice, you’ll get the 15 percent back…well, some of it. The factoring company will charge a fee based on the time it takes the customer to pay the invoice. The longer the customer takes to pay, the bigger the fee. In addition, factors may charge processing fees, ACH fees, or other hidden fees that can quickly add up. All of these costs can really eat into your 15 percent—and, ultimately, your profit margins.
Using Fundbox to finance your invoices isn’t free, of course, but it’s typically more affordable than traditional factoring. You’ll make 12 weekly payments, plus a small fee (approximately 0.5 percent of the invoice value). You also have the flexibility to repay the full amount early without any penalties.
Does it work for a small company?
You don’t need to be a big business to use traditional factoring. However, you do need to do a substantial amount of invoicing—otherwise, it’s not worth the factoring companies’ time. You may also be required to enter into long-term contracts with the factor. That can be a problem if you’re seeking financing as a one-time, short-term solution.
On the other hand, even companies that rarely invoice can use invoice financing. It’s easy to apply, taking just minutes to set up a free account. In addition, you’ve got the flexibility to finance any invoice you want, at any time. Maybe most of your customers pay on time, but your biggest client is always late. Need to finance just that one invoice? No problem.
Who collects on my invoices?
With traditional factoring, the factoring company takes over collecting on the invoices that they have financed. This might work for you if you own a very small business without adequate resources or time to handle your own collections. Maybe you like having that hassle off your hands.
However, if you’re like most small business owners, you really don’t want your customers or clients knowing your financial business. If they find out that you’re using factoring, they might think that your business is in trouble and become leery of working with you. Even in the best-case scenario, there’ll be some confusion about why a third-party company is suddenly contacting them about a payment they owe to your business. If you don’t want your customers to be confused, you have to give them advance notice of what is going on, then answer all their questions about it, which can be even more of a hassle than handling collections yourself.
When you use Fundbox’s invoice financing services, on the other hand, you stay in control of collecting on your invoices. Your customers never know that Fundbox is involved, since there’s no interference in your relationship with your clients.
Invoice Financing vs. Factoring: The Choice Is Yours
Only you can decide whether invoice financing or factoring works best for your business—but now that you know the differences and similarities, you’re better prepared to make the smart choice.