What is the difference between invoice financing and receivable financing?

In 2023, invoice financing (alongside asset based lending) members of UK Finance saw a combined turnover of £316 billion. But what is invoice finance and how does it differ from receivable financing? 

What’s the difference between invoice financing and receivable financing? 

The answer to this depends on who you ask. To many, invoice financing is an umbrella term that encompasses a few different types of invoice based funding solutions – specifically, invoice discounting and invoice factoring. Receivable financing is often used interchangeably with the term invoice financing and can mean the same general umbrella term. 

However, the above definitions are not always the case. Sometimes, receivable financing can refer specifically to invoice discounting, which is only one of the above mentioned types. This can also be called accounts receivable financing. Some people also consider invoice financing to refer specifically to invoice factoring only, with receivable financing referring to invoice discounting and the removal of the umbrella term altogether.

Ultimately, both terms mean selling your accounts receivables (unpaid invoices you have sent out to clients) or borrowing against them by using them as collateral for a short term business loan.  

What does accounts receivable stand for?  

Accounts receivable (AR) is the money you are owed but have not yet been paid. This is in comparison to accounts payable, which is the money you owe your suppliers but have not yet paid. 

AR is considered an asset as it is future income and will one day be traded for cash. Tracking your accounts receivable is important for maintaining stable cash flow, as it signifies the future income flowing into the business and therefore the funds you will have available to pay recurring bills and current employees.  

Invoice discounting vs invoice factoring 

As mentioned, within that umbrella term sit the two distinct invoice finance types – discounting and factoring. Invoice discounting involves borrowing against your sales ledger, this is similar to using invoices clients have not yet paid for as security for a short term loan. Essentially, you send the invoice, the lender extends a percentage of the funds to you (not usually surpassing 90% of the value of the invoice), and when your client repays the invoice, the lender gets what they put forward plus fees and you get the rest. 

Comparatively, invoice factoring involves selling invoices. Sometimes, you sell your entire ledger, whereas on other occasions, you may sell only one invoice or all the invoices from a specific client, this latter option is called spot factoring or selective invoice finance. Invoice factoring is not confidential and clients will often be required to change the account they pay into. Both forms of invoice finance are only as good as the strength of your debtors and they can be admin heavy. With factoring, the factoring company often takes on many of the administrative activities involved in payment collection. 

Why would someone use invoice finance or receivable finance? 

AR finance is a helpful way to help bridge the gap between providing a service to a client and receiving payment, which for many businesses, can occur months later. Here are some of the reasons some people might use receivable finance. 

Get paid faster 

Many B2B businesses are expected to provide 30, 60, and 90 day payment terms when invoicing clients. This can put a strain on cash flow as money is flowing out in line with providing services in a given month, but the money is then flowing back in at a slower pace. Invoice finance can help smooth out these gaps. 

Built in collateral 

Businesses with poor credit can sometimes find it easier to get approved for invoice finance than, say, for a large unsecured business loan. That’s because the security is built into the loan in the form of the invoice itself. Some factoring companies even use the end-client’s creditworthiness to decide whether to extend funding or not. 

Outsourced admin 

Invoice factoring businesses sometimes take over some of the administrative activities involved in collecting and managing incoming payments. This can help reduce some administrative labour. 

Possible reduction in stress 

Within invoice finance sits something called non-recourse factoring. Non-recourse factoring involves selling an invoice and even if the end-client doesn’t pay, your part is played out and the factoring company won’t come back to you for the funds. This could help reduce some of the anxiety involved in waiting for clients to pay their bill. 

Find receivable financing and invoice finance with Funding Options by Tide

We help connect eligible borrowers to our network of over 120 lenders offering up to £20M. If you’re looking for invoice finance, or if you’d like to leverage your accounts receivable to gain funding, we may be able to help. 

Just click the link below and submit your information to find out if your business is eligible. If it turns out that invoice financing is not suitable for you, we may also be able to help you find an alternative solution, such as asset finance, a bridging loan, or a commercial mortgage. 

Find invoice finance.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.