Invoice Financing vs. Invoice Factoring: What’s the Difference?

Invoice Financing vs. Invoice Factoring: What’s the Difference?

Invoice Financing vs. Invoice Factoring: What’s the Difference?

Sometimes, the money your customers owe you just can’t come soon enough. Just like any other business owner, your clients may be struggling with cash flow or any variety of budget issues, and that, in turn, impacts your business. There are a variety of steps you can take to get that cash quicker, from offering to waive late fees or interest, or certain incentives for early payment, but even these may not bring in the cash from those unpaid invoices.

There are at least two other options, however, to getting the cash from those invoices and keeping your business running. Invoice financing and invoice factoring may sound the same, and certainly share some similarities, but are quite different ways of turning those outstanding invoices into cash you can use right away.

What’s Similar

While invoice financing and invoice factoring are, in the end, separate forms of financing, they do share some similarities. By going with either one, you’ll receive a portion (somewhere around 80%) of the outstanding invoices involved. This is good for you, because you can access that cash much quicker than if you had chosen to wait for the customer to come through with their payment. The drawbacks come in the form of interest in other fees, which vary from institution to institution and depending on which option you move forward with.

Invoice Financing

Much more popular with smaller businesses, invoice financing is a relatively simple process. The lender provides a significant portion of the amount of the outstanding invoices, which stand as an assurance to the lender that you’ll be able to make payments moving forward, making it essentially an asset-based form of financing.

Interest rates tend to be reasonable for invoice financing, somewhere in the neighborhood of 3-5%, depending on a variety of factors including your business credit score (check yours for free with Nav.) Depending on the lender and a variety of other factors, your invoice financing could look more like a business loan or a business line of credit. With a line of credit, you’ll be able to draw funds up to a limit established by your lender, and make payments on the amount you’ve withdrawn with interest. A business loan works just like a traditional term loan, with the full amount being funded to you, and being paid off over a set term with interest.

The benefits of this kind of financing are especially evident for companies dealing with cash flow issues in a time-crunch; they may need help making payments of their own or covering payroll, and invoice financing can help them do so. A clear drawback is the added obligation to pay back that amount as time goes on, making it a now-for-then trade off.

Invoice Factoring

Generally favored by larger companies, invoice factoring services can allow an entity to sell their invoices for a portion of the outstanding amount up front, which will then be supplemented by a portion of the remaining amount (minus the factoring fees) once they are able to collect the amount from the customer.

Just like invoice financing, going with invoice factoring gives you nearly instant access to the cash you’re waiting on your customers for. Where with invoice financing you retain ownership of the invoices, invoice factoring involves selling the invoice itself to the factoring service, who then take charge of collecting the outstanding amount. Keep in mind that invoice factoring services are not debt collection services, and the invoice factoring service may never recover the funds. This added liability and responsibility is one of the reasons why invoice factoring is, generally, more expensive than invoice financing.

Whatever your business needs are, there is a service available. If you’re looking to do any form of invoice financing or factoring, be sure to do research into how much the particular service will cost your business specifically.


This article was originally written on November 13, 2018 and updated on July 1, 2022.

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