What is invoice financing and how is it different from factoring?

Invoice financing and invoice factoring solve the same problem — slow-paying customers causing a cash gap — but they do it differently. In factoring, the business sells the invoice to a factoring company at a discount and receives cash immediately; the factor then collects directly from the customer. In invoice financing, the business borrows against the invoice while keeping it on its books and continuing to collect from the customer itself. The invoice is collateral, not a sale.

The practical difference matters for customer relationships. With factoring, the customer often pays the factoring company directly — sometimes receiving payment instructions from a third party instead of from you. With invoice financing, the customer still pays you, and the relationship stays intact. For businesses with close client relationships, invoice financing is often preferred because it is invisible to the customer.

Invoice financing is also sometimes called a 'sales ledger facility' or 'confidential invoice discounting' when the borrowing is not disclosed to customers. Costs vary: typical rates run 1% to 3% of the invoice value per month, plus setup and management fees. Compare the all-in cost (rate plus fees, annualized) against other options like a business line of credit or simply shortening payment terms before committing to a financing facility.