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Invoice financing and invoice factoring are quickly becoming two of the most popular ways for small and medium-sized businesses (SMBs) to fix cash flow gaps fast.
In a world where large companies are increasingly keen to flex their might to ask for unfair net invoice terms, it’s more important than ever for SMBs to get paid for work done well.
Did you know that more than 60% of invoices aren’t paid on time? For a small-business owner, this puts them between a rock and a hard place.
Few businesses can afford to turn down a potential deal, but they also can scarcely afford to wait months on end before they’re paid for their services.
Enter the world of invoice financing. What exactly is invoice financing, and how does it differ from invoice factoring?
What’s the Difference Between Invoice Financing and Invoice Factoring?
Understanding the difference between these two types of funding is trickier than it might seem. The two are closely related, but also have some fundamental differences that are important to understand. A lot of it boils down to who is collecting the money for the invoice itself.
Understanding Invoice Financing
First, you have invoice financing. Invoice financing is when a business is advanced capital based on an invoice for which they’ve already completed or delivered the promised services.
A lender advances a certain amount of money, up to 100 percent of the owed amount, for a simple, transparent fee. The business then pays back that amount to the lender once the invoice finally gets paid.
The key here is that invoice financing functions like a loan against the outstanding invoice. The SMB is still the one on the hook for getting paid. While invoice financing allows you the necessary breathing room to move forward in a pinch, you still need to spend the time and energy to track down the money from your clients.
This is ideal in situations where you want to be able to choose which invoices you’d like to have financed, or when you only want to finance your invoices once in a while.
What Makes Invoice Factoring Different?
Both invoice financing and invoice factoring specifically deal with getting funding based on completed invoices, the difference is in the details. Invoice factoring is a lot like invoice financing, but with some key differences.
In many cases, invoice factoring can be particularly beneficial to companies. This is because not only does it free up much-needed capital, it also allows for more time.
With invoice factoring, the lender is essentially purchasing the invoice, advancing the SMB up to 95% of the total invoice value. The lender will then go about the process of collecting the payment for the invoice themselves. Because you don’t have to worry about collecting the money, you can focus on what matters most: doing business.
Which One is Better for My Company?
Both are perfectly viable options for small businesses looking to get paid what they are owed. It really comes down to what works best for your particular situation.
If you only have a few invoices that are outstanding and would like the flexibility to get paid faster, invoice financing might be right for you. This is especially true if you’re fairly confident and comfortable getting repayment from your customer.
Invoice factoring is still a fast and effective way to get paid but may be optimal if it’s something you require more than just once in a blue moon.
When you have large invoices that you need to be paid; factoring can be your best option. Factoring can also be valuable when you need consistent, ongoing cash flow to come in from those invoices.
Regardless of what kind of funding your business is looking for, FundThrough can help. You can start invoice financing today and get the money you’re looking for in as little as 24 hours. Find out what’s right for your business.