Revenue based financing vs Factoring
Are you struggling to find the right financing option and to understand the differences between non-dilutive options? In this article, we'll explore the differences between revenue-based financing and factoring, two popular alternatives to traditional funding options.
Revenue-based financing is a type of alternative financing for businesses where the lender receives a portion of the company's future revenue. It is a non-dilutive form of financing, which means that the company's management retains complete independence and control, as there is no equity investment or impact on the company's shareholding. Our company, Levenue, provides this type of financing to businesses with recurring revenue through its platform.
But, how does revenue-based financing differ from factoring or invoice financing? It's a common question we receive, and one that we aim to answer in this article.
So ... what’s the difference between revenue-based financing and factoring ?
Factoring, also known as receivables factoring or invoice factoring, is a type of financing in which a company sells its accounts receivable, or outstanding invoices, to a third-party lender for a cash advance.
The lender provides the company with a portion of the value of the invoices upfront and collects payment from the company's customers when they pay their bills. Factoring allows a company to receive cash faster than waiting for its customers to pay their invoices and can be an effective means of managing cash flow. In receivables factoring, the lender takes on the responsibility of collecting payment from the company's customers.
Factoring involves a business selling its outstanding invoices to a third-party lender for a cash advance, while revenue-based financing is based on a company's future revenue. Factoring is often used by businesses that have a lot of outstanding invoices and need cash quickly, whereas revenue-based financing is commonly used by businesses that have stable recurring revenue and need cash for growth investments.
Additionally, revenue-based financing does not require businesses to sell their accounts receivable, meaning they retain control over their customer relationships and billing processes.
Examples of factoring companies: Bibby Factor (UK), Kriya (UK), Factris (Netherlands), Eurofactor (France) Triumph Capital Business (USA), TCI Business Capital (USA), BlueVine (USA) or most of commercial banks (type the name of a bank + factoring).
Ok but ... what’s the difference between revenue-based financing and invoice financing?
Invoice financing, also known as receivable financing, is a financing method used by businesses in which the outstanding invoices are sold to a third-party lender (financing company) for a cash advance. This financing technique can help businesses receive payments faster and improve their cash flow, although it does mean that they must sell their invoices at a discount and pay fees to the financing company.
It is important to note that in an invoice financing arrangement, the business remains responsible for collecting payments (not the third-party).
One key distinction between revenue-based financing and invoice financing is that the latter is based on outstanding invoices, while revenue-based financing is based on a business's future revenue. Additionally, with invoice financing, a business is required to sell its receivables, which could result in the loss of some control over customer relationships and billing processes.
And ... how does it differ from reverse factoring ?
Reverse factoring, also known as supply chain finance, is a financing solution in which a third-party financial provider provides funding to a supplier on behalf of the buyer. It can be used by companies to offer early payment options to their suppliers based on approved invoices. This program allows suppliers to request early payment on their invoices from a third-party lender.
Reverse factoring is different from factoring, which is another type of receivables finance in which a company sells its invoices to a factor at a discount. In reverse factoring, the program is initiated by the buyer rather than the supplier.
Reverse factoring involves early payment of suppliers' invoices, while revenue-based financing involves selling a portion of a company's future revenue to an investor. Reverse factoring is typically used by buyers to improve relationships with suppliers, while revenue-based financing is typically used by companies to access immediate funding.
C2FO (USA), PrimeRevenue (USA), Taulia (UK), Orbian (UK) or DeFacto (France) are companies that deliver reverse factoring solutions.
Finally, financing a business can be done in various ways, and choosing the right method depends on several factors, such as the maturity and size of the company, its financial structure, and its overall strategy.
If you want to know more, contact our team and ask any question here.
If you'd like to learn more about which financing option is best suited for you as a business or investor, don't hesitate to contact our team and ask any questions you may have at this link: contact Levenue.