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Invoice Financing vs Invoice Factoring

Invoice financing vs invoice factoringInvoice financing is becoming increasingly popular. SMEs are struggling with financing after the pandemic, and invoice finance is in high demand as the new method of financing. In previous years, you needed a strong guarantor and estate to borrow money from banks. However, with invoice financing, you don’t need to have real estate to borrow money. Invoice financing is often compared to invoice factoring – so, here are a few pros and cons of both methods.

Invoice financing

Simply put, invoice financing is a non-debt option for businesses to get an advance against unpaid invoices. Companies will acquire your invoices for a small fee, so you don’t have to wait months to be paid.

You can foster a steady cash flow and avoid any outstanding payments. A more predictable cash flow gives you greater control and visibility over payments as well. It won’t show up on your books, and it offers non-recourse cash at a competitive cost. Companies will usually compare your credit score to that of your customers to assess your qualifications.

On the flip side, invoice financing companies can charge huge fees that take a chunk out of your budget. While this method improves cash flow, it can leave you with other issues to resolve. For example, invoice financing companies may contact your customers directly, so your customers become aware that you finance your invoices.

Invoice factoring

On the other hand, invoice factoring is when a business sells its invoice to a third-party company. Once the third party has purchased this invoice, they will send the business part of the invoice upfront. They will collect the payment from customers within 30 to 90 days.

Invoice factoring provides small businesses with quick cash that can resolve some urgent financial issues following the pandemic. The approval process is faster, easier and often less rigorous than a business loan application.

Like invoice financing, factoring can result in hefty fees that settle between 1 and 5% of the invoice amount. This is often much higher than other forms of financing and can significantly impact an SME’s financing.

Companies also have to relinquish control of their invoicing process when they sell it to a third party. You can’t chase up an invoice yourself; you have to wait for the third party to address it. There are also uses with customers failing to pay – especially if you are required to buy back the invoice.

Invoicing is a complex process that can leave companies out of pocket for months on end.

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