Invoice billing versus financing: Understanding the difference

Invoice invoicing or financing? Cash-strapped companies often face a dilemma when they hear two strikingly similar terms in succession. In a tight credit environment, companies turn to certain non-bank alternatives so that they can run their business smoothly.

Out of all available tools, invoice billing and invoice financing are considered the most effective. These financing methods are becoming more popular due to their non-complex nature. But companies have to pick one to go ahead with their operations.

First, let’s understand their significance …

Yes, they are different from each other. Invoicing of invoices differs from many different ways of financing invoices.

In factoring, the commercial factoring company or lender buys a company’s outstanding receivables. The lender can factor in the advance anywhere between 70 and 90 percent at the time of purchase. The balance – less the factoring fee – is also released when the invoice payments are collected.

Under financing, the amount is secured by pledging the assets linked to accounts receivable. A loan base of 70 to 90 is created with a control management fee of 1 to 2 percent.

Coming to their differences …

Flexibility – Although the amount received is more or less the same in both cases, factoring provides greater flexibility than funding. In the former case, the company can pick and choose which invoices to invoice. In the latter, the finance company chooses which invoice to delete.

Security – Invoice financing requires companies to submit all of their accounts receivable as collateral to the financing company. This is generally not the case with factoring.

Treatment Fee – Financing is usually cheaper than factoring. Although only 1 to 2 percent is charged for the outstanding amount in the case of the former, it is 1 to 5 percent in the case of the latter.

Both have their pros and cons. If you are a small business, factoring is the option you may need to go to because some invoice financing companies require at least $ 75,000 a month in sales to qualify.

Both of these methods are a brilliant opportunity to tackle your money management problems. All you have to do is find the company that can finance you with the least processing costs. Factoring billing companies can put an end to your cash crunching situations. They act as a sales and growth engine and prevent hiccups that can stop business. The key here is knowing when to get involved and when not to.