Invoice Financing vs. Invoice Factoring

Invoice Financing vs. Invoice Factoring
Advertiser Disclosure

Both invoice discounting and invoice factoring are means for a business to use money owed to them to get working capital now.

Table of Contents:

Side by Side Comparison:

  • Invoice financing is commonly used to refer to invoice discounting, which is a loan or line of credit which uses money owed to the borrower as collateral.
  • Invoice factoring is a means of alternative financing in which a business sells their clients’ debts for a small fee. 

Main Differences

While there are many differences, the main functional differences between the two stem from which party does the collecting. With invoice factoring, the factor (the one who buys the invoices) is responsible for collecting the debt. While with invoice discounting that responsibility remains with the original business.

Why Choose One Over the Other?

One of the primary reasons why some businesses choose to use invoice discounting is because they can maintain the same relationship with their client and avoid revealing the fact that their business required some short-term financing.

Alternatively, some businesses choose invoice factoring, precisely because it allows them to avoid the responsibility and the risks of collecting. Since the business owner has no responsibility to repay their factor, the only credit history which is being considered by the factor is the credit history of the clients who are invoiced. Whereas, in the case of invoice discounting, lenders need to consider the credit rating of both the borrower and their clients. This may make invoice factoring a better option for individuals with poor credit.

The time you expect your client to pay you back plays a factor in this decision. While invoice discounting uses a weekly interest rate, invoice factoring using a one-time flat fee of 1-5%. This means that invoice discounting will likely be the less expensive option if you expect the client to repay their invoice quickly, but if you expect the client to take a long time to repay you might save by using invoice factoring.

If you’re unsure whether invoice discounting or factoring is the better option for your situation, you could always talk to an expert in the field who will be able to lay out all your options and help you come to the best decision.

What to Consider

The time you expect your client to pay you back plays a factor in this decision. While invoice discounting uses a weekly interest rate, invoice factoring using a one-time flat fee of 1-5%. This means that invoice discounting will likely be the less expensive option if you expect the client to repay his or her invoice quickly, but if you expect the client to take a long time to repay you might save by using invoice factoring. 

If you’re unsure whether invoice discounting or factoring is the better option for your situation, you could always talk to an expert in the field who will be able to lay out all your options and help you come to the best decision.

Close Menu