How Invoice Factoring Differ from Traditional Financing
The presence of invoice factoring is a blessing in itself given how both complex and taxing raising financial resources can be. This debtor type, receivables funding method sure has its unique set of advantages such as zero debt, affordability and a 24-hour quick application to cash release timeline but to a traditionalist, the idea can be a bit too good to be true.
If you’re one allow us to better illustrate how invoice factoring works by comparing it to traditional financing aka a bank loan.
Traditional Financing • Definition: A type of financing where an amount of money is lent on the condition that it will be paid back within a predetermined period, often long term which can range from five to twenty years, with additional interest. • Costs: Traditional financing is governed by interest fees, often compounding in nature, which must be paid on top of the principal. • Requirements: Asset-based collateral, such as real estate properties, may be required as guarantee to the transaction. • Accounting: This is usually recorded as an increase in liabilities, an increase in cash and a debit to an interest expense account for every period. • Users: Bank loans and similar options are very strict in nature and are often available to established entities or those with enough assets on their books.
Invoice Factoring • Definition: It is a type of financing where a company sells its receivable/s or invoice/s to a third party financer at a discount. It is a type of transaction where a business sells there right to collect against said invoice/s in exchange for an advance of their value to be received prior to their actual maturity. • Costs: A predetermined fixed fee, often a small percentage of the total value of the invoice/s factored, shall be paid to the provider. This is often manifested as a deduction on the total amount received by the company as advance. • Requirements: You’ll need creditworthy receivable/s to advance cash from no more no less. • Accounting: As an asset transaction, it is recorded as a decrease in accounts receivables, an increase in cash and a debit to an expense account. • Users: Invoice factoring can be utilized by just about any business regardless of size, type and industry just as long as they make use of a creditworthy receivable from which to advance value from. Even startups, small to medium scale enterprises and recovering entities can use it.














