Small business owner going through her invoices

Invoice Factoring Vs. Invoice Financing: Which One is Right for Your Client?

Cash flow is a common, constant problem for so many small businesses. The lack of funding options can leave many business owners in a bind. A survey from Equifax Canada found that more than half of small businesses don’t feel supported by their banks or their government.

Invoice funding is a way to solve these cash flow problems, especially since business owners wait 40 days on average to get paid.* By getting cash for their invoices, many business owners are able to have more peace of mind around daily expenses and can better handle major projects that drive growth. Knowing the types of invoice funding and choosing the best option maximizes these benefits.

Many bookkeepers and accountants new to invoice funding wonder what the difference is between invoice factoring vs invoice financing. It’s important to understand each type of invoice funding so that you can recommend the best option for your small business clients and their current cash flow situation.

Invoice Factoring vs. Invoice Financing

Invoice factoring definiton

Invoice factoring is a financial tool where a business owner sells invoices to a factoring company. The business owner receives cash for the invoice amount, less fees, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms.

Invoicing financing decision

Invoice financing is a financial tool where a factoring company gives business owners cash for their invoices, and the business owner repays the factoring company themselves. The terms include an agreed-upon repayment schedule, with a fee spread out across the payments. The business owner’s customer pays the business owner according to the established payment terms.

What's the Difference Between Invoice Financing vs Factoring?

Understanding the definitions is just the first step to choosing the right invoice funding option. Like many things, the true differences are in the details.

For both factoring and financing, your client receives cash for your invoice way ahead of 30 to 120 day invoice payment terms common for B2B businesses. As you’ll see, some of the differences are obvious and some less so:

  • Fee schedules. With factoring, the fee is withheld from the advance before it lands in your client’s bank account. With financing, a portion of the fee is added on to each repayment.
  • Invoice totals. Oftentimes, large invoices are recommended for factoring, small invoices are recommended for financing.
  • Repayment plans. The business owner’s customer redirects payment to the factoring company when an invoice is factored. The business owner’s customer pays the business directly as they normally would for a financed invoice. (In both cases the customer is only obligated to pay according to the due date of the invoice; it’s who they are paying that is different).
  • Parties involved. With factoring, your client’s customer is involved because they have to redirect payment. With financing, their customer isn’t involved.
  • Mental burden. When business owners finance invoices, they have to make sure cash is available whenever a payment is due to the factoring company. When they factor invoices, they don’t have to keep an eye on their bank account because the fee has already been withheld from the advance. Additionally, the factoring company takes on the work of handling any accounts receivable. (However, a good factoring company will only contact your client’s customer with your client’s knowledge).

That last point isn’t a discouragement to finance invoices; in many cases it’s the right choice. Monitoring your bank balance is simply a consideration to be aware of.

Next, looking at why business owners fund invoices at all will give you more context when weighing all the options for helping your client boost their cash flow.

Why Do Business Owners Fund Invoices?

On the surface, it seems obvious: B2B customers demand invoices with long payment terms, creating a delay for business owners who need cash, not another account receivable. This happens in businesses of all sizes and across industries, but it’s especially tough on small businesses. Because they often have lower, less established cash flow, it’s harder to ensure there’s enough cash coming into their business bank account to compensate for what’s going out – and that’s not even taking into account cash needed to grow.

Simply put, invoice funding can certainly help business owners make payroll, pay suppliers, and handle an emergency. But it can also be used to fulfill major orders or projects from large customers. Or to ramp up production and service when your client gets a big break and the bookings are rolling in. It’s a fact that you need cash to grow your business. Funding invoices is one way to get it.

Getting back to why business owners fund invoices, those are all the logical reasons, but they’re not the only reasons. Business owners are stressed when they need better cash flow. Not only can it seem like a difficult problem to solve, it takes their attention away from the important work of serving their customers and growing their companies. In these situations, bookkeepers and accountants have said they can be a hero to their clients by recommending invoice funding.

So which funding option is the right one? Chances are, the answer is both.

When to Use Invoice Factoring vs Invoice Financing

Factoring and financing help small businesses in different ways and in different situations. Here are a few use cases directly from owners for each type of invoice funding. Seeing their responses in their own words will give you more insight into recommending a funding option.

I use invoice factoring when…

  • “My business and invoices are growing”
  • “I don’t want to worry about collections”
  • “I don’t want to worry about having enough money in my account for repayments”
  • “I’m able to push the price onto my buyers”
  • “I’m invoicing cross border and don’t want to handle accepting payment internationally”
  • “My invoices are large”
  • “I want to feel comfortable taking on larger deals”

I use invoice financing when…

  • “I need an alternative to wiring my own funds into the business from time to time”
  • “I only need a small amount of money; it’s quick.”
  • “My customer doesn’t accept factoring agreements”
  • “My invoices are smaller”

A few themes are evident. Financing gives customers fast and flexible funding suited to smaller invoices. Factoring gives them more time back in their day and reduces complexity, and is suited to larger invoices.

If you’re still struggling with which one to recommend, dive deeper into the pros and cons of both factoring and financing. Either option will increase your client’s cash flow and help their business grow and thrive.

* 2021 FundThrough customer data

FundThrough is a leading player in the fintech small business working capital space. Based in Toronto, the company accelerates cash flow and enables growth. Its AI-powered invoice funding platform re-imagines invoicing so that small- and medium-sized businesses can get paid instantly and eliminate “the wait” associated with customer payment terms.

To learn about FundThrough’s partnership with Intuit QuickBooks and how you can fund an invoice, click here.

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