Factoring, invoice trading, and crowdfactoring are all financial services that allow businesses to manage their cash flow and working capital more effectively. They are especially useful for businesses that have cash tied up in invoices due to long payment terms or slow-paying customers.
Factoring
By using factoring, the company transfers the right to receive payments on invoices to the factor (the entity that buys the invoice), which assumes, or not, the risk of non-payment by the debtors, depending on whether the factoring is done without recourse or with recourse.
In the case of non-recourse factoring, the risk passes to the factor because, if the customer fails to pay the invoice, the company that issued and sold the invoice is not obliged to assume the debt and repurchase the invoice. In this case, the responsibility for collecting the invoice necessarily passes to the factor.
Factoring with recourse implies that, despite the sale of the invoice, the risk of non-payment of the invoice remains with the company that issued and sold the invoice, since if the customer doesn't pay the invoice the company has to assume the debt by repurchasing the invoice, so it remains ultimately responsible for collecting the invoice
Invoice Trading
Invoice trading is related to Factoring. It is a type of invoice finance that operates on a peer-to-peer (P2P) platform. It's a modern take on traditional factoring. Businesses list their outstanding invoices on an online platform, and investors bid to purchase these invoices at a discount. Once an invoice is fully funded, the business receives the funds, providing immediate working capital. The investors then collect the full amount of the invoice when the customer pays. It's essentially a competitive marketplace for invoices where the control remains with the business, which can choose which invoices to sell and at what discount.
It is a much more flexible system than traditional factoring because it does not require the transfer of large volumes to the factor, and the company can decide to transfer just one invoice.
Invoice Trading
Invoice trading is related to Factoring. It is a type of invoice finance that operates on a peer-to-peer (P2P) platform. It's a modern take on traditional factoring.
Businesses list their outstanding invoices on an online platform, and investors bid to purchase these invoices at a discount. Once an invoice is fully funded, the business receives the funds, providing immediate working capital. The investors then collect the full amount of the invoice when the customer pays.
It's essentially a competitive marketplace for invoices where the control remains with the business, which can choose which invoices to sell and at what discount. It is a much more flexible system than traditional factoring because it does not require the transfer of large volumes to the factor, and the company can decide to transfer just one invoice.
Crowdfactoring
Crowdfactoring is an evolution of factoring and Invoice Trading, combining the concept of crowdfunding with invoice financing. It is a concept very close to Invoice Trading, the main difference being the number of investors usually involved, which is higher in the case of crowdfactoring.
In crowdfactoring, numerous individual investors or companies come together through an online platform to purchase portions of an invoice or a bundle of invoices. The risk and reward are spread across a wider pool of investors, and similar to invoice trading, businesses can access immediate funds based on their receivables.
Crowdfactoring platforms often allow for lower minimum investment thresholds compared to traditional factoring, which makes it accessible to a wider range of investors.
All three concepts are related in that they involve the selling of a business's invoices to improve liquidity and manage cash flow. The major differences lie in the method of transaction, the parties involved, and the technology used to facilitate these transactions. Traditional factoring involves a single factor institution, while invoice trading and crowdfactoring are more decentralized, leveraging online platforms to connect businesses with multiple investors.
