What is the difference between invoice financing and factoring?

Invoice financing sets forth a way for many businesses to boost their cashflows and balance their finances more efficiently. As a financial solution, it’s becoming more and more popular for growing and established businesses who want to take the weight of unpaid invoices off their shoulders.

A common question many ask regarding invoice financing is the following: what is the difference between invoice financing and factoring? Since both occupy similar fields in the world of financing, it’s an excellent question, and in this blog, we’re going to give a quick rundown of the difference between financing and factoring.

Invoice financing

Invoice financing is a service offered by financial solutions providers to improve cash flow in businesses that are suffering from unpaid invoices. The process sees your provider give you a proportion of your outstanding invoices of up to 90%. The money is normally in your account around 24-48 hours as soon as the invoices are totalled up, granting you the funds without you needing to wait for the invoice to be paid. Once the invoice is paid in full by the buyer, you’ll pay back the amount you received from your provider, plus any services fee or interest accrued according to your agreement.

In this model, unlike invoice factoring, you are responsible for collecting the invoice from your buyer. You’ll still need to chase any unpaid invoices on your own terms. Generally, this results in less money spent on the financing service, but you’ll have to devote resources to collecting the invoice money.

Invoice factoring

Invoice factoring (also referred to as debt factoring) is actually still a kind of invoice financing and shares many of the same basics. Like invoice financing, factoring sees your provider give you a proportion of up to 90% of your outstanding invoice monies, approximately 24-48 hours after the invoice has been written up. Your cash is still released earlier and your cash flow is still boosted. You’ll still pay back the provider once the invoice has been paid and you’ll still pay services fees and interest.

The key difference here is that with invoice factoring, your finance provider is responsible for collecting the invoice from your buyer. In this model, the provider buys the accounts receivables and follows up on the invoices on your behalf - your buyers will deal directly with the provider instead of you. This service can cost a little more, but for many businesses, the benefit outweighs the cost – where you’ll have to pay a little more, you won’t have to engage in the often-times arduous task of following up on unpaid invoices.

Regardless of which works best for your business, either invoice financing or invoice factoring, the entire process of invoice financing with Hitachi can help with cash flow issues in almost every situation, freeing up funds which can be redirected into more pressing businesses operations. 

Click here for further information on Invoice Finance and to find out how we can help your business.