Factoring or Invoice Finance?

Factoring and Invoice Finance are both methods of financing that businesses can use to access cash by leveraging their accounts receivables. However, they have some fundamental differences that are worth considering.

Firstly, Factoring involves the outright purchase of accounts receivables by the factoring company, which takes ownership of the debt. This allows the business to receive an immediate cash advance but places responsibility for collections in the hands of the factoring company.

On the other hand, with invoice finance, the business retains ownership of the accounts receivable and uses them as collateral for a loan.

Secondly, factoring companies take on the responsibility of collecting payments from customers, whereas businesses using invoice finance are responsible for their own collections. This may impact customer relationships, as the factoring company takes over the collections process with factoring. Does that mean Invoice Finance should be considered more than Factoring?

Thirdly, factoring typically involves higher fees than invoice finance due to the factoring company taking on more risk by owning the debt.

Finally and most importantly, invoice finance does not allow for credit risk transfer, an option which factoring offers. Which is the best instrument then?

Both Factoring and Invoice Finance can help to access cash using accounts receivables, but, as with any tool it is important to understand the properties of the instrument before using it.

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