Invoice Factoring vs Invoice Financing: What's the Difference?

If your customers pay on 30, 60 or 90-day terms, you can have a full order book and still be short on cash. Invoice factoring and invoice financing both turn unpaid invoices into cash sooner. They sound alike, but they work differently.

The short answer

• Invoice factoring: you sell your unpaid invoices to a factoring company. It pays you most of the invoice value now, collects from your customer, then pays you the rest minus its fee.
• Invoice financing (also called accounts receivable financing): you borrow against your unpaid invoices. You stay in charge of collecting, and you repay the lender when your customer pays.

How invoice factoring works

1. You deliver the work and send the invoice.
2. The factor advances a percentage of the invoice. (Do NOT state any specific percentage.)
3. Your customer pays the factor directly.
4. The factor sends you the remainder, minus its fee.

Things to know:

• Your customer will usually know you use a factor, because they pay the factor.
• Approval depends heavily on your customers' payment history, not just yours.
• Recourse vs non-recourse: with recourse factoring you buy back invoices your customer doesn't pay. Non-recourse shifts some of that risk to the factor, usually at a higher fee. Read the contract for exactly what's covered.

How invoice financing works

1. You use your open invoices as collateral.
2. The lender gives you a loan or a line of credit up to a share of those invoices.
3. You collect from your customer as usual and repay the lender, plus interest and fees.

Things to know:

• Customers usually don't see it.
• You keep the collection work and the risk that a customer pays late.
• It's often closer to a line of credit, so it can suit businesses with steady invoicing.

Side by side

Comparing the cost

Factoring fees and financing rates aren't quoted the same way, so convert both to a total dollar cost for the time you'll use the money. Our guide to factor rates vs interest rates vs APR shows how.

Which one fits?

• Factoring can fit if you'd rather hand off collections, your customers are larger and pay reliably, or your own credit history is short.
• Financing can fit if you want to keep customer relationships in-house and have steady invoices and decent business credit.
• Neither may be right if the cash shortfall isn't caused by slow-paying invoices. Build a 13-week cash flow forecast first to see where the gap really comes from.

How this is different from a merchant cash advance

A merchant cash advance isn't a loan and isn't tied to invoices: a funder buys a share of your future card or bank deposits. It's a different product with different costs; see what is a merchant cash advance.

For a broader comparison, our guide on working capital vs a business loan puts these options in context.

FAQ

Is invoice factoring a loan?

No. Factoring is a sale of invoices. Invoice financing is borrowing against them.

Will my customers know?

With factoring, usually yes. With invoice financing, usually not.

Can a new business use factoring?

Sometimes, because factors focus on your customers' ability to pay. Terms vary by company.

This article is general education, not individual financial advice. Terms, approval and timing are set by each provider.

Talk to an advisor if you'd like help comparing options.