Billing or invoice financing? Cash-strapped companies often find themselves in a quandary when they hear two strikingly similar terms in a row. In a tight credit environment, companies are turning to certain non-bank alternatives to run their businesses smoothly.

Of all the tools available, invoice factoring and invoice financing are considered the most effective. These financing methods are becoming more popular due to their non-complex nature. But companies must choose one to proceed successfully with their operations.

Let’s first understand its meaning …

Yes, they are different from each other. Invoice factoring differs from invoice financing in many ways.

In factoring, the business factoring company or the lender acquires the outstanding accounts receivable from a company. The lender can factor the down payment between 70 and 90 percent at the time of purchase. The balance, minus the factoring fee, is also released once the invoice payments are collected.

Under financing, the amount is guaranteed by a pledge of those assets associated with accounts receivable. A debt base of 70 to 90 is established with a control management commission of 1 to 2 percent.

Coming to their differences …

Flexibility: Although the amount received is more or less the same in both cases, factoring offers more flexibility than financing. In the first case, companies can choose which invoices to factor. In the latter, the financing entity will choose which invoice to compensate.

Collateral: Invoice financing requires companies to present all of their accounts receivable as collateral to the finance company. This is generally not the case for factoring.

Processing fee: Financing is usually cheaper than factoring. Although only 1 to 2 percent is charged against the outstanding amount in the case of the first, it is 1 to 5 percent in the case of the second.

They both have pros and cons. If you are a small business, factoring is the option to go because some invoice finance companies require a minimum of $ 75,000 in sales per month to qualify.

Both methods are a great option for tackling your cash management problems. All you need to do is find the company that can finance you with the lowest processing fees. Factoring companies can put an end to your cash shortage situations. They act as an engine for sales and growth and prevent setbacks that could stop business operations. The key here is knowing when to participate and when not to.