When your business is in need of some quick cash, these are two of the options available for financing. But what exactly is the difference between these often confused models, and how can they be used to manage your cashflow?
As both invoice factoring and invoice financing are lending models that base their funding on the working capital of your business, it is easy to confuse the terms. For a fee, both financing and factoring will provide a business with a loan based on outstanding invoices from customers – sounds the same, right?
In fact, although the terms are misused often, there are many fundamental differences between the two which are critical to understand when making decisions for the future funding of your business.
The main difference is that while financing an invoice means using your invoice as collateral to show that you will be able to pay back a loan at a given time,factoring an invoice is essentially selling it on to a third-party who then takes control of the payment of that invoice. In this case the customer will be notified to pay the investor directly, instead of the business. This type of system is generally disliked by small business as it can disrupt the relationship between them and their customers by introducing a third-party. Grapple’s model is to provide invoice financing, we want to help you grow and not get in the way of the relationship you’ve built with your client.
Generally, invoice factoring will require a business to finance their entire sales, giving the business less control over the amount they wish to borrow, as single invoice lending is not an option. Businesses will be expected to complete a minimum amount of invoicing per month, placing it out of reach of some smaller operations. In this sense, traditional factoring is more an ongoing line of credit, providing long term funding for a growing business, but it does come at a cost. Invoice factoring may seem like a cheaper option on the surface, but loans often come with hidden fees, such as yearly account fees, processing fees, late customer payment fees, exchange fees etc.
Invoice financing on the other hand, is a far more flexible lending model. A business can choose exactly how many invoices they wish to fund, and when, giving them the ability to access on demand funding. The business retains control over its invoices, and thereby its financial confidentiality and customer relationships are unaffected.
Unfortunately, just like invoice factoring many invoice financing companies charge many fees, such as yearly account fees, processing fees, audit fees, and reporting fees. This is how Grapple is different. Grapple’s fees for financing are transparent and far lower than traditional invoice factoring and invoice financing. For example, Grapple’s innovative peer-to-peer invoice financing model has just one flat fee to use the platform, plus an investor fee, which is charged as a percentage of the funded amount, and both are charged at settlement of the invoice.
Another key difference between the two types of funding is the time involved in accessing funds. While factoring loans will often take weeks to approve and can sometimes require property security, invoice financing providers, like Grapple, can approve invoices for financing within 24 hours, giving your business a fast cash injection when needed.