Factoring And Invoice Discounting Are Not The Same Thing
Factoring and invoice discounting are two
invoice finance tools, that a business can use to quickly
raise capital to fund growth. While both factoring and
invoice discounting involve using sales invoices sent to customers,
as collateral, to increase cash flow, they should not be treated as
different names for the same thing.
Invoices are often overlooked as business
assets when looking around for funds, but your sales
invoices can provide a flexible source of finance. Rather
than have money tied up in invoices awaiting customers payment;
through invoice finance your business can receive an upfront
payment, often up to 90% of the gross value of the invoice.
The remaining amount is paid when your customer pays the invoice to
the invoice finance provider (less any agreed service fee).
Invoice finance is split into two main
areas - invoice factoring and invoice discounting. Both
have some major differences, and while one may work for your
business, the other may not. Here we give you a quick
view of some differences between factoring and invoice discounting
- which one you choose should depend on the particular needs of
- Invoice factoring is
where the factoring company essentially buys your accounts
receivables from you. They take responsibility for the credit
collection and recovery of the money owing so this can be a great
option for a business that doesn't have the infrastructure in place
to collect outstanding invoice payments, freeing up valuable
management time! If bad debt is a concern for your
business then bad debt protection or credit insurance is
- With Factoring funding is based on
the strength of your invoices. It doesn't require
your business to have produced annual accounts and therefore
factoring is an ideal product for new companies. What's more
the funds are available immediately you raise your first invoice
and will grow with your turnover.
- Invoice discounting is more
similar to a loan using your accounts receivables as
collateral - it provides funding only. You keep the
responsibility for collection from your customers and therefore you
will require your own in-house credit control department.
- If you have invoices due for
collection from long standing clients and you are
concerned that the factoring company might put undue pressure on
them to pay up; you should consider the invoice discounting option.
After all, your business relationship with your customers
could be impacted by the behaviour of the factoring company towards
them. As mentioned before, with invoice discounting, you
retain ownership of your invoices, simply using them as security
for a capital injection, and so you determine how and when you
contact your clients to get payment.
- You should also consider invoice
discounting if you don't want your customers to know that
you're getting outside assistance with your business cash flow.
With factoring, because the factoring company will collect
the money on your behalf, it will be obvious to your customers and
they may see that as a sign that your business is doing poorly.
With invoice discounting your customers need not know about
your confidential arrangements.
These are some of the differences between factoring and invoice
discounting. For more information please read our factoring buyers
guide or for read our article on factoring misconceptions.
If you want to improve your cash flow within 24hours then why
not talk to some factoring and invoice discounting companies that
could help - get quotes here.
Get Your Quotes Now