Difference between invoice discounting and invoice factoring
Late payments often lead to strained cash flow and is arguably one of the most common reasons B2B businesses struggle. Invoice financing can be a brilliant solution to these problems and can provide your company with the extra help you may need. But what are the different financing options?
Both invoice factoring and invoice discounting involve borrowing against your invoices. Although both are similar, they have distinct differences which could appeal to your business, depending on what you are looking for.
Invoice discounting is a confidential financing option that can give you an immediate injection of cash, based upon the value of your invoices. The funder will assess the quality of your invoices, looking into your clients’ credit history and their likelihood of paying. If the funder deems your invoices to be of an acceptable quality, they will give you an advance against your invoices value, usually up to 90% of their value. As you then collect in your invoices, you will go on to repay the funder along with their fees. Importantly, invoice discounting allows you to manage your own credit control.
Invoice factoring works in almost exactly the same manner. The lender will give you a cash advance based upon the value of your invoices, as they assess the quality of your invoices, checking your client’s credit history. Most lenders will typically advance anywhere up to 90% of invoice value if the quality of your invoices is acceptable. The credit that you receive is secured against your book debts. The process for payment is also similar, except with the lender collecting invoices for you and taking the money they are owed along with their fees, before returning any residue.
The key differences
The key and most important difference between invoice factoring and invoice discounting, is that when you opt for invoice discounting the business keeps control of its sales ledger. Because you keep this control, your clients should be unaware that you are even using an invoice discounting facility. This can be important for businesses that are concerned about their image and would rather be discreet about the fact that they are using a discounting facility.
When it comes to factoring, the lender will take control of the management of your sales ledger and credit control. They will also look to chase down your payments, giving you more time to spend on running the business.
Because factoring companies manage the credit control and collection process and also monitor the quality of your invoices, they will often offer credit when perhaps a bank would not. Even new start-up businesses can often arrange factoring facilities.
Invoice discounting is for older, more established businesses which have good credit control systems in place, low bad debt histories and good quality customers. It follows that they generally have a higher level of turnover. These circumstances represent a lower risk to the factoring company and that coupled with the company managing its own credit control results in those businesses which opt for a discounting facility getting better rates and lower charges.
Which is right for you?
Both factoring and discounting have their pros and cons, the best option for you will be totally dependent on the type of sector you are in, how your business operates and its size. You also have to consider how effectively you have managed your sales ledger and if you would rather keep control of your credit control.
If you have a relatively small, growing business, and you have little time or experience collecting your book debts, factoring could turn out to be a better option. On the other hand, if you would rather your clients didn’t know that you were using a finance facility, invoice discounting would be the more suitable option.
What can we do for you?
If you’re concerned about unpaid invoices, or you constantly feel as though clients are paying late, a factoring or discounting facility could help give your business that extra boost. Choosing the correct sort of facility, however, can be difficult.
With our experience and expertise in the industry, we are ideally placed to help advise you on the best option for you and your business. We can help talk you through the processes involved with both invoice discounting and factoring. We work closely with 50 of the top blue-chip funders, which gives us access to exclusive rates and details.
Some of the partners we work with...
Why Choose Us?
WF Financial Solutions is an independent broker of invoice, asset and trade financing solutions with links to lenders of all sizes and specialties. WF Financial Solutions has helped many clients through the range of lenders and their varying services and are proud to offer advisory and introductory services to finance providers that suit your needs.