Invoice Factoring and Invoice Financing – The Pros and Cons

Invoice financing is a bit different from factoring. Although they both produce the same result, instant working capital, there is a definitive difference between the two funding methods.

With invoice financing, or invoice discounting, you use the invoices as collateral to get a cash advance and you remain responsible for collecting payment on the invoices from your customers.

The main differences between invoice financing and factoring are that you maintain control over the invoices and you still deal directly with your customers in the usual way. You get around 80-95% of your invoice value upfront and depending on the terms of the factoring/finance provider, you repay the advance in weekly or monthly installments.

With invoice factoring, the factoring company pays you a similar portion of the invoice advance upfront and then takes over credit control of the invoices. After the company receives payment from your customer, it sends you the rest of the advance, minus the agreed-upon fees.

Invoice financing is typically a better option for businesses that want to maintain control over invoices and deal with their customers directly, while factoring works better if you don’t have the time to take control of invoices and you trust the factoring company to be respectful and professional when dealing with your customers. 

The pros

  • Fast cash: Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers.
  • Improved cash flow: You can keep loyal customers on longer payment terms but still improve your cash flow to help you grow your business.
  • Quick approval: Invoice factoring provides financing to companies that might not be able to get capital from other sources, such as a traditional bank, because of a lack of collateral, poor personal credit or a limited operating history. Typically, factoring companies care only about the value of the invoices you’re looking to factor and the creditworthiness of your customers.
  • No collateral required: Invoice factoring is unsecured financing, which means it doesn’t require collateral — an asset such as real estate or inventory that the lender can seize if you fail to pay.

The cons

  • High fees: The service can be expensive. You also have to watch out for hidden fees, such as application fees, processing fees for each invoice you finance, credit check fees or late fees if your client is past due on a payment. Late payments can trigger an increase in your annual percentage rate, the annual cost of borrowing money with all fees and interest included.
  • Loss of direct control: Because the invoice factoring company may collect on the invoices directly, you need to make sure it’s ethical and fair when dealing with your customers.
  • Customers’ bad credit or weak finances could derail your financing: The factoring company may need to verify the creditworthiness of your customers. If the customers have a history of late or missed payments, or if the business has weak revenue, you may not be approved for the financing. The factoring company expects to get paid back, just like other types of lenders.
  • No guarantee of collection: There’s no certainty the invoice factoring company will successfully collect on your unpaid invoices. If it’s a recourse factor, the factoring company may require you to buy back the unpaid invoice or replace it with one of equal or greater value.

>> Is your business in need of fast, short-term financing? Do you need to access cash faster than your customers pay you?

Populous World is an Invoice Finance provider that unlocks working capital for UK businesses.

Bridging your business’s cash flow gap is something that Populous World excels in delivering, providing you with the funding tools to grow and sustain your business.

For more information, visit us or contact a member of our funding team: [email protected]


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