With so many types of alternative financing available to small businesses it is easy to get confused. Many solutions have slight differences in their offerings, some even have different names for the same product. One example is factoring. Many ask us “Is invoice factoring a loan?” Let’s delve into the confusing answer to a simple question.
Is there such a thing as an invoice factoring loan?
To best answer this question, you need to understand how invoice factoring works. With invoice factoring, a business agrees to sell its (outstanding) invoices to a factoring company that pays it a percentage of the invoice amount upfront and refunds the remaining difference (less fees) after receiving payment. Because the business is paid for selling a product, the invoice, no borrowing of money takes place. So, factoring is not a loan.
Why do people think factoring is a loan?
As stated before, alternative financing has many variations and options. One reason for the confusion is there is another financing option: Invoice Financing. Similar names, different methods of financing.
With invoice financing, the business borrows money from a lender, a loan, using its unpaid invoices as collateral. The lender then advances the business a percentage of the invoice value, and the business repays the loan over time, plus interest. It is this similar name that confuses people.
What is the difference between invoice factoring and a loan?
Here is a table summarizing areas of difference between invoice factoring and its loan counterpart invoice financing:
| Characteristic | Invoice Factoring | Invoice Financing |
|---|---|---|
| How does the business get money? | Sells invoices to a factoring company at a discount | Borrows money from a lender using invoices as collateral |
| Who collects the payment from the customer? | The factoring company | The business |
| Does the business retain ownership of the invoices? | No | Yes |
| How much money does the business receive? | A percentage of the invoice value | The loan amount minus interest |
| What are the cost differences? | Typically higher than invoice financing | Typically lower than invoice factoring |
| What are the funding timeframes? | Very quick. Funding comes in as little as 24 hours after account setup | Weeks to months |
>> RELATED READING: Everything You Need to Know About Invoice Factoring
Financing vs. financing
Confusion can also arise when people talk about “Invoice Financing,” the loan option discussed above, and “invoice financing,” the blanket term for any financing where invoices are involved. Occasionally, invoice factoring will be used under the generic heading of invoice financing, adding to the misunderstanding.
But I digress…
So, Is Invoice Factoring a Loan?
The answer is no, not factoring. Financing? Yes, sometimes.
If you would like to explore invoice financing options, including invoice factoring, we would be happy to help. Give us a ring at 865-670-2345 or schedule a call with one of our construction financing experts.
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