What Is the Difference Between Invoice Factoring and Invoice Financing?

Posted 3 years ago in Small Business Tips
by Taylor Larsen

We’ve all been there, watching the clock, waiting for a client to come good on an invoice. We want to trust that clients will pay us, but when the payment is out of our hands, it’s hard not to bite our nails off in anxious anticipation.

But do we need to be nervous when there are plenty of ways to keep the money flowing in while we wait for the invoices to come good?

Let’s chat about three different strategies for bringing home the bacon even when the client isn’t quite done cooking said bacon.

Invoice factoring

Invoice factoring is pretty common in industries where vendors take a long time to pay, like trucking and telecommunications. Providers get somewhere around 85% of the invoiced amount upfront. They receive the rest once the lender collects from the customer (minus fees). You read that correctly–the lender (oftentimes played by Academy Award winner Al Pacino) collects from the customers.

Unlike the original provider, the lender isn’t nearly as interested in your previous or future customer service interactions: they want to get paid. They act as a sort of collections agency in this regard, for better or worse. Depending on who you are borrowing from and how long it takes them to collect, it can damage the relationship with your client or even cost you future business.

The money isn’t an instant a big deposit into the ol’ bank account after signing up, either. Although these companies are open to dole out plenty of money (up to millions of dollars), most of these financiers take a week or two to finally get you the greenbacks.

For businesses that can’t afford to be nice or passive-aggressive their way into payment, factoring provides a great way to get paid and move on.

Invoice discounting

Invoice discounting, sometimes referred to as “discrete factoring,” avoids some of the pitfalls that come from involving a third-party in the billing process.

Much like invoice factoring, invoice discounting companies pay the service provider a percentage of the original invoice up front (between 85-100%). In the meantime, these companies charge their preset fees or interest rates until the balance is paid by the original client or service provider.

Where the similarities end with invoice factoring is all in what the client knows. Invoice discounting companies set up a separate account in your or your company’s name where invoices are paid into. Customers are never the wiser as to the fact that you are submitting for a cash advance on their invoice. Ignorance is bliss, babycakes.

Invoice discounting also gets you paid faster, often times within just a couple of business days. Discreet factoring also gets providers hooked up with at least 85 percent of that cash money coming up front.

Just don’t look for these companies to shake the loose change out of your client if they aren’t paying. Discreet factoring companies aren’t interested in playing the bad guy. They just want to keep you rolling in the black without any cash-flow hiccups.

Invoice Financing

Invoice financing combines all the benefits of invoice discounting and bundles it in a way that makes it accessible to small businesses. It is the main way that ZipBooks makes money. You invoice is an accounts receivable. Even though you haven’t been paid on it yet, it still has value. You can wait to realize the full value of that invoice when it gets paid in 30, 60, or 90 days, but we’ve got a better way of doing it here.

Invoice financing by ZipBooks gives you 100% of the invoiced amount minus an origination fee and charges 0.5% of the invoiced amount every week until you pay the amount back in full. No tricks, no surprise rates, and certainly no car salesman. ZipBooks automatically schedules repayment over a 12 week period. For those eager to balance the budget (looking at you, Mr. President), a company can repay the cash advance back in as little as a week. For invoices financed Monday through Thursday before 2 PM EST, ZipBooks can get money into your account the very next business day.

Is invoice financing right for your business?

Is your cashflow all over the place? Would you benefit from a smooth stream of cash running directly into your accounts receivable?

Don’t be duped into thinking old school. Consider the cost of bank overdraft, credit card fees or even a handout from your local loan shark. Sure, you make someone else happy by throwing your money away, but does it really help you run a successful business?

Think new school with invoice financing. With 100% of the original invoice coming to your bank account at the snap of your fingers, it’s easy to see which choice is best. One-half of one percent in interest per week is much cheaper than processing a credit card. Sometimes getting a few hundred more Delta SkyMiles just isn’t worth a fat credit card fee.

Keep the money where it belongs (i.e. your bank account) and move on up to invoice financing with ZipBooks.

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