Invoice factoring vs financing:
What’s the difference?

52% of UK small businesses experienced late payments in 2022, and one in every five corporates paid their suppliers after 90 days in 2023. So, you’d be forgiven for assuming that companies are likely to wait longer to get paid during 2024.

However, there are many solutions to help prevent cash flow problems and ensure you can trade with confidence.

Whether it’s invoice financing, debt factoring, or discounting, you can ‘bridge the gap’ and minimise credit risk between revenues and cash flow. Or, use trade credit insurance to provide security.

If you’re feeling spoilt for choice or are unsure which suits you and your business best, we’re here to help. Here we define these terms, explain the differences between the finance types, and outline the advantages and disadvantages. 

Invoice factoring, sometimes known as ‘debt factoring’,is the process of selling outstanding invoices to a third party to improve the cash flow of your business and maintain financial stability.

This is a popular finance option for businesses of all sizes across a variety of sectors because it allows a company to free up assets that are locked up in invoices. If a business has lengthy payment terms, invoice factoring can help prevent working capital issues, and improve purchasing power, allowing leaders to focus on business growth and innovation.

Like any loan, this service comes with a fee. When using invoice factoring, you can release funds in exchange for a percentage of the invoice value. This usually ranges between 70% and 90% of the total value owed.

The key benefits of invoice factoring are:

• Invoice factoring contractors frequently offer to handle invoicing and debt collection on your behalf. You don’t need to put up collateral or provide a personal guarantee, and the factor will collect the money from the customer.
• Less time and money is spent on debt collection, so attention can be spent on running the business.
• Factoring is also non-recourse. This means that, if a customer refuses or can’t pay, you’re not obliged to repay the money once factoring is in place. However, because of this, some factoring companies may run credit checks on your customers before purchasing.

Invoice financing is a form of short-term borrowing in which your business borrows money against the amount due on invoices you’ve issued to your customers.

If you’d like to read more about invoice financing, you might be interested in: What is invoice financing and how does it work?

Invoice finance is sometimes known as ‘invoice discounting’. Invoice discounting, like financing, is a loan secured against outstanding invoices. It can be compared to an overdraft facility secured against your accounts receivable. Invoice discounting is a form of asset-based lending that provides funds usually within as little as a few days, making it a desirable option for businesses with imminent cash flow issues.

Once an invoice or bill is sent, it becomes known as an ‘account receivable’ until it is paid. Therefore, ‘accounts receivable financing’ and ‘receivables financing’ are often considered to be the same as ‘invoice financing’.

However, it is important to know that accounts receivable financing can be structured in several ways, including as a sale or secured asset loan.

We’d recommend that you always read the fine print and have a thorough understanding of any finance terminology before committing.

If you’d like to read more about invoice financing, take a look at:  5 questions to ask on invoice finance and invoice finance: a buyer’s guide.

Or, for further information on insuring against non-payment by customers, get in touch.

Both factoring and financing are ways of securing cash tied up in invoices, but which your company chooses will be heavily influenced by:

Business size – Discounting is typically used by big companies with a higher turnover and steadier customer base rather than factoring. This is due to the level of credit control and risk. Factoring is commonly used by small to medium businesses.

Debt collection ability – If you don’t have the business capabilities to invest time and effort into debt collection, factoring may be a more desirable option.

Confidentiality required – Discounting allows you to keep control of debt collection and client relationships, but factoring means the invoice finance provider will deal directly with your customers. If you want to keep things in-house, discounting may suit you best.

Ultimately, the best decision for your business depends on your specific needs and circumstances.

Of course, there is another more reliable option to maintain your cash flow.

Trade credit insurance provides businesses with cover should a buyer go insolvent or not pay for any other reason. Beyond this, it will give your business confidence to build strong relationships and break into new markets.

Trade credit insurance will cover your trade receivables due within 12 months and help you assess the creditworthiness of your customers, reducing the risk of bad debt.

As a global leader in trade credit insurance, Allianz Trade protects the cash flow of 62,000 clients worldwide. Could you be business 62,001?

See how much trade credit insurance will cost your business.