Here’s what to consider when picking the best cash flow solution for your business.
Leveraging your unpaid invoices for immediate cash through invoice factoring or invoice financing can be a business-saving move. So how do you choose? Let’s walk through the two quickest routes to getting your $$$.
Let’s start with some painless definitions. Invoice financing and invoice factoring are separate forms of business financing that give you an advance on unpaid invoices, meaning you get paid without having to wait on the customer. With invoice financing, you work with a lender and pay fees or interest on the amount you borrow—you guessed it, it’s a loan. Invoice factoring, on the other hand, is a purchase agreement. You sell your invoices to a factoring company, and they collect from the customer on your behalf.
Now, the difference really begins to show when taking a look at fees, requirements, privacy, work, and risk.
- Fees: The first question to pop into your head is probably, Which one costs more? Invoice financing fees typically fall between 1% to 3% per month. For factoring, you’re looking at 2% to 4.5% per month.
- Requirements: Factoring companies won’t refuse you over limited operating history, credit, or collateral. What counts is the outstanding invoice amount and the customer’s credit—making applying and getting approved easy. Alternatively, invoice financing loans are based on the value of your invoices.
- Privacy: Customers won’t know you’re using a lender but will get a heads up from a third-party factoring company that their invoice was sold (they have to pay them after all). Let’s be clear here though. Factoring doesn’t automatically make customers see your business in a bad light. The practice has become so mainstream that customers and their accounting departments often work with factoring companies regularly. In a nutshell, it’s NBD.
- Work: One of the big perks of factoring is that it removes the need to chase down a client for cash. Since a third-party is collecting, your accounting department suddenly has more time (and less stress) to do more work.
- Risk: Like to play it safe? If that’s the case, factoring might be your best bet. Once a third-party company signs up to collect receivables, you’re off the hook if a client doesn’t pay, and it’s on them to get the cash. Considering invoice financing? Know that you’re going to have to pay whether your client eventually does or doesn’t.