Invoice factoring is the outright sale of your accounts receivable to a third party — the factor owns the invoice, collects from your customer, and you have no repayment obligation. Invoice financing (also called accounts receivable financing) is a loan secured by your invoices — you retain ownership, remain liable for repayment, and the invoices serve as collateral. The distinction drives different accounting treatment, tax consequences, and balance-sheet outcomes under FASB ASC 860.
Both products convert unpaid invoices into working capital — but they are fundamentally different legal transactions. Invoice factoring is a sale: your business transfers ownership of the receivable to the factoring company (the factor) for immediate cash. Invoice financing is a loan: your business pledges invoices as collateral, receives a cash advance, and repays the lender when customers pay — or from other cash flow if customers don't.
FASB ASC 860 — Transfers and Servicing of Financial Assets is the US GAAP standard that determines how a receivable transfer is classified. Under ASC 860, a transfer qualifies as a true sale (derecognized from your balance sheet) when three conditions are met: (1) the transferred assets are legally isolated from the transferor (even in bankruptcy), (2) the transferee has the right to pledge or exchange the assets, and (3) the transferor does not maintain effective control. Classic factoring — where the factor owns the receivable, assumes collection risk, and is legally isolated from your estate — satisfies ASC 860's true-sale criteria. Invoice financing, by contrast, is a secured borrowing: the receivable stays on your balance sheet as an asset, and you recognize a corresponding liability (the loan). The practical difference: factoring keeps your debt-to-equity ratio clean; financing adds leverage.
The IRS follows the same conceptual divide. Under IRS Section 1001, the sale or exchange of property (including a receivable) triggers gain or loss recognition — the difference between your adjusted basis in the receivable and the amount realized. For most businesses, the adjusted basis of a receivable equals its face value, so factoring at a discount creates a deductible factoring loss (the discount/fee). Invoice financing is treated as a borrowing: no gain or loss at origination, and the interest/fees paid are deductible as IRS Publication 535 Business Expenses interest. The timing of deductions differs: factoring fees are recognized at the time of sale; financing interest accrues over the loan term. Consult your CPA for your specific situation.
In non-recourse factoring, the factor assumes the credit risk — if your customer becomes insolvent and the invoice is uncollectable, the factor absorbs the loss (subject to the definition of 'eligible non-payment' in your contract). In recourse factoring, if your customer doesn't pay, you must buy back the invoice. Invoice financing is almost always recourse — you borrowed against invoices you still own, so you repay regardless. The recourse structure matters for ASC 860 classification: a recourse arrangement where the transferor must repurchase defaulted receivables often fails the true-sale test and is reclassified as a secured borrowing.
Factoring: $100,000 invoice → $80,000 advance (80% advance rate) → customer pays in 45 days → factor charges 3% × 1.5 months = $4,500 → you receive $100,000 − $4,500 − $80,000 already advanced = $15,500 back. Net cost: $4,500 on $80,000 for 45 days ≈ 15% annualized. Invoice financing: $100,000 pledged at 80% borrowing base = $80,000 drawn at 10% APR → 45-day interest = $80,000 × 10% × 45/365 ≈ $986. Net cost: ~$986 on $80,000 for 45 days. Financing is cheaper here — but you retained collection risk and the receivable stayed on your balance sheet.