It’s no secret that funding a small business is not always as straightforward as we would like it to be. Revenue doesn’t always come in when it should, and it can be difficult to secure a traditional business loan in a timely fashion. This can make it hard for some small businesses to meet their financial obligations or to take advantage of opportunities.

These problems can be particularly tough on businesses that need to wait a considerable amount of time for invoices to be paid.

Fortunately, there are options specifically designed for the funding needs of these businesses. Some of the more common options include things like invoice financing and export factoring.

Invoice Financing

Invoice financing refers to a range of financing options that involve using the future value of accounts receivable to obtain funding in the present. Invoice factoring and invoice discounting are the two most common types of invoice financing.

Invoice Factoring

With invoice factoring, the business usually has a steady relationship with a financier (known as a factor) who handles all of their factoring needs. As a result, the factor will take over managing the company’s accounts receivable and collections. 

Essentially, the invoices are handed over to the financier and the company gets an agreed upon percentage of the value of the invoices. The factor then handles collections from the customers. When the customer pays, the factor gives the business the remaining balance minus the fees that come with the service.

Along with getting access to funding, one of the key advantages of invoice factoring is that you’re able to outsource the management of your accounts receivable and collections. This can free you up to focus on the core operations of your business. A great way to make your invoice factoring more efficient is using invoicing software to facilitate your financial processes.

Invoice Discounting

Invoice discounting is similar to factoring in many ways. One of the key differences is that the company will still handle its own sales ledger and collections.

With this option, a business can borrow money against the value of an unpaid invoice. The financier first provides a percentage of the value to the borrower. Then, once the company collects on the invoice, they must pay the money back plus the agreed upon service fees.

Even with invoice discounting, you still have to manage your accounts receivable, but this option can be advantageous for some businesses. This option allows you to choose which invoices to use for financing. For example, if you have a customer with a large account who takes a long time to pay, you can use invoice discounting for that one customer without having to use financing on all of your other invoices.

Export Factoring

Export factoring is similar to invoice factoring, except that it involves overseas transactions. If a business deals with foreign customers, it is often a lengthy process to get paid, and export factoring is a way to free up some of that money before the invoices clear.

Since export factoring deals with international transactions, there are a few more working parts to the process. Once you make an agreement with an export factor, they would take control of your accounts receivable. When they receive an invoice from your company, they give you a percentage of the value and then assign the invoice to an import factor in the customer’s respective country.

The import factor is then responsible for collecting money from the customer and remitting the funds to the export factor. Once the export factor receives the funds, they will release the remaining balance to you minus any fees that may come with the service.

Invoice financing and export factoring can be great options for businesses that can’t wait for customers to pay invoices.

That said, the terms and fees can vary greatly from one service provider to the next. Before making an agreement for any type of invoice financing, you need to investigate all of your options and make sure you understand the terms of the contract.

Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing.

This article does not constitute legal advice.

The opinions expressed in the column above represent the author’s own.

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