Invoice Financing and Invoice Factoring are both beneficial options for businesses and enterprises to help them maintain a steady cash flow. They allow businesses to continue their operations and focus on productivity and growth even when they are waiting for overdue accounts to be paid. However, this is where the similarities between these financial terms come to an end. Even though a business could benefit significantly from either when utilised correctly, it’s essential to be mindful of how they work before choosing to opt between one or another. Let’s explore:
Invoice Finance is the service provided by a third party to a business. Companies rely on future payments from their clients and customers to operate and function consistently. This is where a business applies for invoice financing. Invoice financing allows companies to secure funds for their operations without having to dip into their cash reserves. Invoice financing is secured against the invoices issued. This frees up working capital for businesses to continue with their manufacturing and production until the invoices are paid. When a payment is collected on time, the third-party provider of the invoice financing is compensated for lending, and the transaction is complete.
On the other hand, invoice factoring is the process of selling all the unpaid invoices of a business to a factoring company. Also referred to as debt factoring, the invoice factoring company buys control over an enterprise’s unpaid invoices. It then becomes their task to collect on the invoices and charge the business a certain percentage when the invoice is paid by the customer or client.
Deciding on which financing option is better than the other depends entirely on the nature of the business.
Invoice Financing does not require any collateral other than the unpaid invoices making it a more convenient option for small and medium-sized businesses. The business pays the financing company back with some additional fees after collecting their customers’ invoices. This is fundamentally better for organisations that deal with repeat customers on significant transactions. Since the collection process is handled internally, businesses value their customer relations, and communications proceed accordingly. Any delay or confusion in payment can be resolved internally without business relations taking a hit.
Invoice Factoring is when businesses relinquish their unpaid invoices to factoring companies to collect the payment on their terms. For a factoring company, they save more time and funds the sooner the payment is received. Although the collection processes always adhere to the rules and law, there will be friction between the parties. Communication might not always be two-sided or considerate of each other’s circumstances. Here, customer relations might take a hit in pursuit of the payment.
Invoice Financing is usually issued even when the business is still small and only been operating for a couple of years, and only has a handful of clients and customers. Small or medium sized businesses can often get invoice finance without requiring any involuntary tie-ups or long-term commitment.
Invoice Factoring usually demands a contractual tie-up between your business and the factoring company for future invoices as well. It is in the best interest of a factoring company to take a bulk of invoices during a specific period.
Fees and Costs
Invoice Financing is pretty simple. The finance company usually charges you a particular percentage, along with their service charge, on top of the amount issued. When all your invoices are received, you return the lent amount, and the transaction is complete.
Invoice Factoring has a bit more to it. Factoring companies who buy your invoices, to a certain extent, undertake the risks of some debtors going bad. If that happens then, your business may stand liable to compensate the factoring company. Also, if your invoices date back, it might require more time and investment before they can be collected. This might add up as well.
Looking at the bigger picture, choosing invoice finance for small and medium-sized businesses might allow more flexibility and control to manage uncertain times.
If you are looking for invoice finance for your SME, then Grow Finance can give your business breathing room by offering a flexible and straightforward line of credit. Grow Finance’s invoice finance solutions have been created with SMEs in mind to assist in their growth. Grow Finance facilitates growing businesses with invoice finance solutions, designed primarily to cater to small and medium-sized enterprises.
To find out more, talk to the Grow Finance team today, call 1300 001 420, or if you are ready to move forward, then apply now.