Invoice Factoring vs B2B BNPL

One of the most popular and well-known ways for B2B firms to get paid quickly is via invoice factoring. It’s a flexible financing solution that helps businesses boost their cash flow by unlocking invoice payments earlier than they would otherwise.

In recent times, B2B BNPL has emerged as a viable alternative for sellers looking to ease cash flow issues while also extending favourable payment terms to buyers. This type of finance is like having your cake and eating it. You get paid at the point of purchase by a lender, while your client can take 30, 60 or 90 days to pay.

Please be aware that while this guide is intended to be helpful, it is not financial advice.

B2B BNPL vs invoice factoring: an overview

The table below shows an overview of how B2B Buy Now, Pay Later stacks up against invoice factoring.

Let’s dive in and learn more about invoice factoring and B2B Buy Now, Pay Later.

What is invoice factoring? 

Invoice factoring is where a third party lender, such as a bank or financial services provider, will purchase your accounts receivable (unpaid invoices) at a discounted rate. The lender – known as a “factor” – pays you up front and takes responsibility for collecting payment from the buyer on the due date. They will chase late payments and carry most of the risk.

When you send an invoice to your buyer, instead of your own bank details, you’ll put the account of the factor. Usually within 24 to 48 hours, the factor will transfer around 90% of the invoice amount to your account. 

Once the factor has received the full payment from your buyer, it will transfer the remaining money, minus an agreed fee. 

Invoice factoring goes by many names. You may have heard it referred to as:

• Invoice financing 
• Debt factoring
• Accounts receivable financing
• Receivables financing

What are the advantages of invoice factoring? 

1. Quick access to cash

Factoring allows businesses to receive immediate funds against their outstanding invoices, which can help boost cash flow and meet financial obligations.

2. No debt is incurred

Invoice factoring is not a loan but the sale of an asset (invoices), so it doesn't add to your company's debt.

3. No credit check on your business

Getting approval for factoring is based on the creditworthiness of the customers who owe invoices to your business, rather than the credit score of your business.

4. Can be used by businesses with limited credit history

Because of the point above, businesses with limited or poor credit may still qualify for factoring based on their customers' creditworthiness.

5. Resources are freed up

Time, money and energy that would usually be used to collect payments and chase debt can be directed to other business ventures.

6. The factor takes on the risk

Usually, the factoring company will take on responsibility for the risk of unpaid or late invoices.

7. Setting up is simple

Unlike some other types of B2B financing, invoice factoring usually does not involve much paperwork.

8. No need to put up collateral

For some forms of financing, businesses are required to put up some form of collateral or security. This is not necessary for invoice factoring.

What are the disadvantages of invoice factoring? 

1. The fees

Factoring involves a fee or discount charged by the factor, which is usually a percentage of the invoice value. This cost may be higher than other financing options, and you will never recoup the entire value of the invoice.

2. Loss of control over collections

Once invoices are sold, the factor takes over the collections process. Your customers may be confused when contacted by a third-party for payment, or they may assume your business is in financial trouble.

3. It’s not viable for all businesses

Factoring may not be suitable for businesses with high-risk customers, low-profit margins, or small invoice amounts.

4. If your buyers are consistently late payers, the fees could increase

Some factoring companies will adjust their fees based on the payment habits of your buyers.

5. Scammers can use invoices to commit fraud.

In 2018, four in ten firms were impacted by invoice scams. 

What type of business could benefit from invoice factoring? 

Some businesses are more suited to invoice factoring than others. If your business matches any of the descriptions below, you may benefit from selling your invoices to a factor.

• Firms with short-term cash flow issues, such as agencies who need to pay staff or tax bills.
• Freelancers like copywriters or graphic designers looking to smooth out their cash flow.
• Businesses that need up front capital such as retail, manufacturing or recruitment companies.
• Scale-up companies that need fast payments to grow quickly.
• Businesses offering payment terms lasting more than 30 days. 

What type of business is not a good match? 

Conversely, there are situations where invoice factoring is not ideal. Find an alternative form of financing if your business matches the descriptions below.

• Companies that are not yet issuing invoices or receiving revenue, such as seed companies or start-ups. 
• Businesses that need to borrow more than the amount of their invoices.
• Firms with fragile or close client relationships may need to tread carefully when bringing in a third party. 

Now, let’s compare what we’ve learned about invoice factoring with B2B Buy Now, Pay Later.

What is B2B BNPL? 

Most people have used or heard of Buy Now, Pay Later in their personal lives. Some examples of providers include Klarna, ClearPay and even Apple. At the checkout, customers have the choice to pay in 30 days or break their payment down into three monthly instalments. Although the customer delays the payment, the merchant is paid in full (minus a small fee) instantly.

But BNPL is nothing new. Sofa and kitchen appliances shops have offered this service for years. Meanwhile, businesses have been transacting in a very similar way for decades, with trade credit.

What is new, however, is the technology. It’s part of a wider trend called “embedded finance”, and it has been ground-breaking for e-commerce sites. 

Today, BNPL is beginning to enter the business world. Buyers can click a button at the checkout, and suppliers are paid instantly. This is similar to invoice factoring, but much faster. 

What are the advantages of B2B BNPL? 

1. You get paid up front and in full

Receiving full payment upon delivery of the goods significantly improves your cash flow, enabling you to direct resources to the success and growth of your business.

2. You keep the full payment, even if your buyer defaults

With solutions like Hokodo’s, suppliers receive and keep the full amount of the invoice, even if the lender cannot collect the payment later. Conversely, factors may try to claw back some money from you if they can’t collect from your buyer.‍

3. Buyers benefit from generous payment terms of 30, 60, 90 or more days

BNPL solutions don’t just benefit you – they also empower you to offer better payment terms to your buyers.

4. It saves your time and resources

B2B Buy Now, Pay Later brings the full trade credit management process into one solution, meaning that you can save the time and resources associated with fraud checks, credit scoring, financing, insurance, payment processing and collections.

5. It can be integrated into your checkout

B2B BNPL platforms offer plug-ins and integrations which benefit your business and report-keeping. Buyers get a smooth checkout experience and you don’t have to deal with any of the admin of selling your invoices to a factor.

6. The B2B BNPL provider takes responsibility for risk

Sellers are fully protected against credit and fraud risks.

7. No need to put up collateral

For some forms of financing, businesses are required to put up some form of collateral or security. Like factoring, this is not necessary with B2B BNPL.

What are the disadvantages of B2B BNPL? 

1. Some sellers may not have an online checkout

You may not have an online platform, or your buyers may prefer to pay via traditional invoices. This can be a challenge with some providers, but Hokodo’s solutions can be integrated into offline sales journeys.

2. Your buyers will deal directly with a third party lender

The B2B BNPL provider you partner with will be responsible for collecting payment and contacting your buyers. If handled incorrectly, this could impact the business relationship. 

3. The fees

Like with invoice factoring, there is a fee. The fee model will vary from supplier to supplier. With Hokodo, you pay a small % of the value of each order that is paid for with BNPL. 

What type of business could benefit from B2B BNPL?

B2B BNPL can benefit a variety of business types including:

• E-commerce sites or platforms where suppliers sell online. 
• Business with offline sales that want to harmonise their payment processes across channels.
• Businesses that want to offer trade credit in an online setting.
• Businesses which need invoices paid quickly for cash flow but want to offer competitive payment terms to buyers.

Manchester-based wholesaler Shonn Brothers is just one business reaping the benefits of a B2B Buy Now, Pay Later solution. 

“Hokodo has provided an innovative and revolutionary experience for our wholesale and trade customers giving them the opportunity to Buy Now, Pay Later,” explains Daniel Shonn, Director. “It is an interesting proposition with great sales potential.”

What type of business is not a good match?

There are a small number of scenarios where B2B BNPL might not be the right fit. These include:

• Businesses that do not have an online platform and don’t want to embrace a digital solution for offline transactions.
• Businesses offering bespoke services that require manual invoices.

Invoice factoring vs B2B BNPL: which is right for you?

If you are a B2B supplier with an online or offline platform, BNPL could be a great option not just for you but also for your buyers. It gives them another payment choice and the chance to defer payment, while you receive funds up front and are protected against risk. Before going ahead, always check that you’re happy with the lender who could be dealing directly with your clients. 

If you find yourself struggling because it’s taking too long to get paid, invoice factoring could also be a good option. Before diving in, take time to find the right lender you’re happy with. After all, they will be communicating with your buyers on your behalf, so professionalism and courtesy are a must.  

Download our ultimate guide to learn more about your options when it comes to B2B financing.