Both invoice factoring and invoice financing solve the same problem: a business has issued invoices on Net 30/60/90 terms and needs the cash sooner. The structures, however, are different. Factoring is a sale of the receivable; the factor owns the invoice and collects from the customer. Financing is a loan secured by the receivable; the borrower retains the customer relationship and collects payment themselves.
Factoring: who collects matters
In a factoring arrangement, the business sells the invoice to a factor, usually for 80%–90% of face value upfront. The factor then collects the full amount from the customer and, after deducting fees (typically 1%–5% of invoice value depending on terms and customer credit), remits the rest to the business.
The factor — not the business — communicates with the customer about the invoice. For some industries (trucking, staffing, manufacturing) this is normalized. For others (professional services, agencies), having a factor's lockbox notice land in front of a customer can create awkwardness.
Financing: borrow against, don't sell
Invoice financing (sometimes called accounts-receivable financing or invoice discounting) is structured as a revolving line secured by the receivables. The business draws against unpaid invoices, repays when customers pay, and continues collecting from customers directly. The lender's involvement is invisible to the customer.
Financing typically costs less than factoring because the lender isn't taking on the collection function — but it requires stronger borrower credit and reporting.
Recourse vs. non-recourse
In recourse factoring, the business is on the hook if the customer doesn't pay. In non-recourse, the factor absorbs the credit loss (subject to specific carve-outs in the contract — disputes, returns, and quality claims usually still flow back to the business). Non-recourse pricing is meaningfully higher.
When each fits
Factoring fits businesses with strong customer credit but thin operating histories, customers comfortable with third-party collection, and a need for outsourced collections.
Financing fits businesses that have been around long enough to qualify for a line, want to preserve the customer relationship, and have the back-office capability to manage collections themselves.
Sources
Editorial note: This article is general information about how small-business lending products work. It is not financial, legal, or tax advice for any specific borrower. Loan terms, eligibility, and rates vary by lender, borrower profile, and current market conditions, and the specific facts of your business will determine which products and structures actually fit. Consult a CPA, attorney, or SBA-approved lender before making decisions that affect your business.