Invoice Factoring, Consumer Factoring & Bank Overdrafts Explained

So you’ve heard of invoice factoring? But you’re not quite sure what it is. Is it a loan? Is it an overdraft?

Let me put it this way, invoice factoring (something you may not realise) is used every day by most people all around the world. Did you know using a credit card is just another form of factoring? It’s what is known as consumer factoring. This differs slightly to what we here at ARCF specialise in, which is classed as commercial factoring.

Essentially Consumer Factoring is when you purchase a good or service, and at the point of exchange you don’t actually pay with your own money. A financial institution pays for the good or service for you. For example when you buy a pair of jeans with your credit card, your purchase is recorded and the bill is basically sent to the bank and they pay the seller for you. You are then allowed to pay the bank back at a later date.

The same process is used for commercial factoring. As a business, you provide a good or service to a customer and issue an invoice, instead of waiting for your customer to pay you within say 30 days, the factoring financier will step in and pay your invoice straight away.

So there you have it people – factoring is not a conventional loan and it’s not an overdraft. It is the ongoing purchase of one’s invoices to promote cash flow.

So while we are on the topic – what is the difference between factoring and an overdraft?

Well simply put an overdraft is borrowing a lump sum of money from the bank, you’re usually charged more interest and you will definitely have to provide collateral and a mountain of paperwork to gain approval plus its very time consuming. Factoring is funding cash for money that is already owed to you. It’s just giving you the money sooner rather than later so that you can generate cash flow.

Leave your comments below: Do you think an overdraft is the way to go or invoice factoring?