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Invoice Financing vs. Invoice Factoring

Invoice Financing vs. Invoice Factoring
Lauren Ward
Lauren WardUpdated September 17, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you have a small business, you know that cash flow can be a big concern. And when you’re searching for small business loans, you may come across two kinds of funding called invoice financing and invoice factoring. Although they sound similar, these two financing products are not identical. Their common thread is that they both let you use your company’s invoices to secure a cash advance and free up cash flow. But both the structure and the process for invoice financing and invoice factoring are quite different.
FeatureInvoice FinancingInvoice Factoring
Collections ProcessCustomer oversees processFactoring company oversees process
Financing StructureLoan or line of creditFactoring company purchases invoices

What Is Invoice Financing?

Invoice financing helps bridge short-term cash flow issues that might occur because of unpaid invoices from clients. You can use those invoices as collateral in order to receive a lump sum of financing before they’re paid. Usually, you’ll receive between 80% and 90% of the invoice total face value upfront. Then, once the invoice is paid, you’ll receive the remaining balance. But first, the lender will take out its financing fee, which is usually a percentage of the invoice amount. Oftentimes this is charged as a monthly rate. So the longer it takes for your customers to pay you, the more you’ll have to pay for your invoice financing. Invoice financing is also known as accounts receivable financing because the borrowed funds are secured by future revenue. It’s considered a type of cash flow loan. One of the benefits of invoice financing is that you maintain direct relationships with your customers, rather than having the financing company manage the collections process on your behalf, which is typical with invoice factoring.

Example of Invoice Financing

Here’s an example of how invoice financing works. Say a company decides to finance $10,000 in invoices. It received 80% upfront, thus adding $8,000 back into the business’s cash flow. The invoice financing company charges 3% for every month the invoice is outstanding. After two months, the customer pays the bill. The company is charged 3% monthly, which amounts to $300 per month.So, instead of receiving the remaining $2,000, the company receives $1,400. The total cost of the invoice financing was $600 in this hypothetical situation. 

Pros and Cons of Invoice Financing

There are both benefits and drawbacks to using invoice financing. 


  • Keep You in Control: Your company is in charge of the collections process. That means you get to maintain your relationship with your customers and they don’t have any insights into the business’s finances. 
  • Smoother Cash Flow: For many companies, the improved cash flow helps, especially if they have long billing cycles.
  • Easy to Get: It’s also easy to qualify for invoice financing compared to other small business loans. Your invoice documentation is the primary factor considered when you’re applying.


  • Uncertain Costs: Although you retain control of collecting payments, you’re not in control of the total cost of invoice financing. Your business could end up paying a lot if a customer takes months to pay. 
  • Volume Minimums: Invoice financing may also require you to meet volume minimums. Even if you don’t want to finance all of your invoices, you may be compelled to in order to get approved. 
  • Liability for Unpaid Invoices: Your business is also responsible for repaying the borrowed funds if customers don’t pay their invoices. 
  • Fees: You may have to pay termination fees when you’re ready to end your financing agreement. Look at these details carefully before signing a contract.

What Is Invoice Factoring?

Invoice factoring can be considered a type of invoice financing, but it comes with some important distinctions that can make a big difference. Rather than borrowing against your invoices, with invoice factoring, you’re actually selling the invoices to a factoring company. The factoring company takes over the collections process, removing your ability to manage that part of your customer relationships.The cost of invoice factoring loans also differs from the cost of invoice financing. You’re charged a factor rate (a decimal figure) that may be applied on anything from a weekly to a monthly basis. Most invoice factoring is structured as recourse factoring. That means your business is liable for invoices that go unpaid. Non-recourse factoring does exist, but it’s less common and typically comes with extremely high rates.

Example of Invoice Factoring

There are a number of ways an invoice factoring agreement could be structured. Here’s an example of a company that uses invoice factoring at a factor rate that amounts to 1% for every 10 days it takes the customer to pay a $10,000 invoice.The business receives 80% ($8,000) upfront, and the factoring company takes over the collection process.The customer takes eight weeks to pay the invoice, resulting in an 8% factoring fee—or $800. The remaining $2,000 balance is reduced to $1,200 to cover the fees. So the company receives a total of $9,200 for the customer’s $10,000 invoice.

Pros and Cons of Invoice Factoring

Invoice factoring can help ease cash flow issues, but there are also drawbacks to consider.


  • Doesn’t Require Collateral: Invoice factoring is considered unsecured financing. You usually sell the invoices to the factoring company, but you don’t need to worry about using other company assets to secure the loan.
  • Smoother Cash Flow: This type of financing can also improve your company’s cash flow.
  • Available with Bad Credit: You could get approved even with bad credit.


  • Could Jeopardize Customer Relationships: One of the major disadvantages is that you can’t control how the factoring company deals with your customers when it’s collecting invoices. This may or may not be important to you, depending on your business model.
  • Expensive: Typically, you will be charged high rates, especially if you expect a long billing cycle. Also expect to pay additional fees, such as invoice processing fees, service fees, early termination fees, and potentially more.
  • Liability for Unpaid Invoices: Since recourse factoring is more common, you’ll usually be responsible for the borrowed funds if your customers don’t pay their invoices.

Invoice Financing vs. Factoring: What’s Right for You?

It’s important to understand the details of any potential financing agreements when you’re comparing invoice financing and invoice factoring. The cost is key. For both options, look at the total cost of the financing, including factoring fees, service fees, and any other costs, including your liability if your customers don’t pay their invoices. Also find out how termination works and what scale of fees you can expect at that stage. Comparing small business loan rates of any kind is crucial when making decisions about what small business financing to opt for. Another important consideration is the type of relationship you have with your customers. If it’s important to retain control in managing those touchpoints, then invoice financing is probably a better choice. But if you don’t have a personal relationship with your customers and would welcome the help in collecting invoices, then you may prefer factoring.

The Takeaway

Invoice financing and invoice factoring certainly differ, and the better option will depend on your business model and cash flow needs. If you decide that a loan might better serve your financing needs, give yourself the widest range of options by easily comparing multiple small business loan offers at the same time within minutes on Lantern by SoFi

Frequently Asked Questions

What is the difference between invoice financing and factoring?
What are the pros and cons of each?
Photo credit: iStock/RichVintage

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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