Are you a business owner who is often dealing with lots of outstanding accounts receivables? Frustrating, isn’t it? You are not alone. The problem is that when there are lots of late payments, you can be short on cash. Then you’ll have problems paying your employees, paying your utilities, and even ordering stocks for your business.
Naturally, you want to find the best solution to this problem. Among those solutions are invoice factoring or financing, also known as accounts receivable financing. Perhaps you are wondering if they are the same, and if not, what the difference is between the two.
In this post, Porter Capital, your trusted invoice factoring company, will discuss the differences between the two, so you can better decide which approach is right for your business:
The Main Difference
The biggest difference between invoice factoring and invoice financing is who does the collection for the unpaid invoices. For the latter, the customer gets complete control of collections, while for invoice factoring, it’s the factoring company that purchases the unpaid invoices and therefore takes over all the collections.
What Is Invoice Financing?
Invoice financing or invoice discounting, as some call it, is borrowing money against outstanding accounts receivable. A lender will give you a part of the unpaid invoices (sometimes up to 90%) upfront through a loan or line of credit. Then once the client pays the invoice, you’ll have to pay the lender back the principal plus the interest and any fee that may be included in the agreement. You, as the business, will still be in charge of collecting outstanding money that is owed by your clients.
What Is Invoice Factoring?
Think of invoice factoring as invoice financing with a twist. Here, an invoice factor buys the accounts receivables that you are owed. Then they take over the responsibility of collecting from your clients. The lender will pay you a certain percentage of the total outstanding invoice amount. When they have collected the full amount, they’ll then give you the difference and keep the agreed-upon amount for the services they’ve rendered. It will be the clients dealing with the factoring company and not you.
Which One Is the Right Choice for You?
Invoice factoring is better suited for businesses with outstanding account receivables with long time frames or at least 60 to 90 days. It’s also the better choice for those who don’t want to deal with outstanding receivables on their own. Note that this may be the more expensive option. Also, you need to consider the possibility that the customer might not pay the invoice at all, and they’ll charge more.
Also, you have to be okay with the idea of other people interfacing with customers for their payment. You won’t be handling the payments on your own, and other people would know that you are using financing.
Invoice factoring is a good option for businesses in different industries, especially if it’s one that’s looking to expand as soon as possible. If you need immediate access to your money to improve your cash flow, work towards your expansion or perhaps get your employees paid.
Once you have decided which route is right for you, Porter Capital is here to help you. We are a reputable lender and factoring company in Birmingham, AL, that can provide your business with working capital solutions. Contact us today to find out how we can help you!