Factoring vs. Financing

If your business sells to other businesses (B2B), you are likely familiar with the pain of Net-30, Net-60, or even Net-90 payment terms. Invoice factoring and invoice financing are the two most popular ways to solve this problem, but business owners frequently confuse them.

The Core Difference

The fundamental difference comes down to ownership and debt.

• Invoice Factoring: You sell your invoice to a factoring company. The factoring company owns the invoice, collects payment from your customer, and assumes the waiting period. It is not a loan, and it does not create debt on your balance sheet.
• Invoice Financing (or Discounting): You use your unpaid invoices as collateral for a short-term cash loan. You still own the invoices, you are still responsible for collecting payment from your customer, and it appears as debt on your balance sheet.

When Should You Choose Factoring?

Factoring is almost always the superior choice for growing businesses, startups, and companies going through rapid expansion. You should choose factoring if:

• You have a newer business without a long credit history.
• You want to avoid taking on new corporate debt.
• You don't have a dedicated accounts receivable team to chase down late payments.
• Your customers are large, creditworthy corporations or government entities.

When Should You Choose Financing?

Invoice financing is typically reserved for highly established companies. You might choose financing if:

• Your business has a pristine credit rating and high net worth.
• You have strict confidentiality clauses and cannot let your customers know a third party is involved in payments.
• You have a robust, aggressive in-house collections department.