Both invoice discounting and invoice factoring are cash flow solutions designed to free up funds for companies that are solvent and operationally sound but which could benefit from a short term cash injection. Invoice factoring is a means through which a business can effectively sell its ownership of specified invoices and its rights to the money due under its terms. The benefits of factoring are that a company can access cash much more quickly than they otherwise would if they were obliged to wait until a debtor settled the amounts due.
Invoice Factoring & Invoice Discounting differences
Discounting has essentially the same benefits as factoring and involves most of the same features but it is a confidential process. Thus, the clients being issued the relevant invoices are not informed that your company is outsourcing payment collection. For some companies this confidentiality is seen as an important gain and therefore they will prefer discounting to factoring. Both are slightly different and can help business funding in many different ways.
Maintaining control over your business funding
Unlike with invoice factoring, the invoice discounting process relies on the company that issued the invoice pursuing the recipient for payment. Under these circumstances, there is no need for the recipient to be made aware that their invoice has been sold. For some companies this scenario will be seen as an advantage but for others the simplicity of invoice factoring holds the greater appeal.
With factoring, an invoice can be sold and the responsibility for chasing up payment in relation to that invoice is then passed to a third party. For smaller businesses in particular this can be a valuable benefit of factoring because they can simply sell their invoice or invoices for a pre-agreed price and then move on to focus on other aspects of their operations that require attention.
What type of business use this type of asset based lending?
Factoring and Invoice Discounting are suited to businesses in sectors and industry types such as:
But in any business that provides services or goods to other businesses and gives customers credit terms of 30-90 days, Factoring and Invoice Discounting can solve the problems associated with slow payment.
The benefits of Factoring and Invoice Discounting
- Releasing up to 90% of the value of your outstanding invoices within 24 hours
- Funding can be secured without requiring other assets
- Cash is freed up to overcome cashflow problems or grow the business
- The level of funding available increases with your turnover
- Paying supplier invoices promptly increases your power to negotiate discounts
- Factoring and Invoice Discounting services are competitively priced
- Factoring and Invoice Discounting providers often offer excellent business guidance
The additional benefit of Factoring is that it comes with a complete credit control and collection service, enabling you to focus your resources on other areas of your business.
In regards to Discounting, you attain the advantage of managing your own credit control and debt collection. Hence, your customers are never aware that a third party is involved or that your business might be having cashflow problems.
Likewise, Factoring and Invoice Discounting are useful options for:
- Business startups — flexible start-up finance to get your new company off the ground.
- Growing businesses — putting your cash back to work for your business as soon as you’ve earned it.
- Struggling businesses — bridging the gap between invoicing your customers and getting paid.
Costing up both options
There is a balance to be struck for any company considering using invoice factoring or discounting between the value of selling invoices and waiting for however long it takes for those invoices to be settled under normal circumstances.
Generally speaking, a company utilising either form of fundraising solution will be able to secure between 80% and 90% of the amount of money originally due to be paid by their clients. Discounting will typically involve slightly lower charges and fees than factoring.
Which is right for you?
Whether you choose a Factoring or an Invoice Discounting facility will largely depend on the size of your business and your sales ledger management resources.
If your business is relatively small and your human resources limited, the credit control and collection service that comes with Factoring is likely to suit you better.
If your business is larger, and you have the human and information resources to efficiently manage your own sales ledger and debt collection — or if you feel strongly that you want your own company to deal with debt collection — Invoice Discounting is likely to be your preferred option.
Getting advice from a Invoice Factoring Broker
If you are involved in running a business that could benefit from the potential to generate a cash injection through invoice factoring or discounting then there are a number of different options available. It is always best to enter an arrangement that works best for your precise situation and we can help as a specialist invoice factoring broker like Invoice Funding and determine exactly what that should be.
If you would like to know more about funding solutions for your business, feel free to complete the online enquiry form. Once it has been received a funding specialist will contact you by return.