Factoring and invoice discounting are both financial tools that can release funds tied up in your unpaid invoices, involving a lender who agrees to advance money against outstanding debtor (customer) balances. The essential differences between invoice factoring and invoice discounting lie in who takes control of the sales ledger and responsibility for collecting payment, and the level of confidentiality.
In factoring, the provider takes the role of managing the sales ledger, credit control and chasing customers for settlement of their invoices. The customer settles their invoice directly with the factoring company, so your customers are likely to be aware of the fact that you are factoring.
With discounting, your business retains control of its sales ledger and chases payment in the usual way. Your customers pay their invoice amount into a trust account that is managed by the funding company but is in your name. With a confidential facility, the use of invoice discounting lender is not disclosed and therefore your customers do not know a third party is involved.
What are the benefits of invoice factoring and invoice discounting?
Those differences aside, the benefits of both types of finance are similar. With either you can:
- Release up to 90% of the value of your outstanding invoices within 24 hours
- Secure funding without requiring other assets
- Free up cash to overcome cash flow problems or grow the business
- Pay supplier invoices promptly and increase your power to negotiate discounts
- Increase the level of funding available with your turnover
- Services for both are often competitively priced and offer excellent business guidance.
Who uses invoice factoring and invoice discounting?
Factoring and invoice discounting are particularly suited to businesses in areas such as Manufacturing, Recruitment, Couriers & Logistics, Construction but in any business that provides services or goods to other businesses and gives customers credit terms of 30-120 days (after the job has been completed), factoring or discounting can solve the problems associated with slow payment.
Invoice factoring and invoice discounting are useful options for:
New businesses — flexible start-up finance to get your new company off the ground
Developing and growing businesses — putting your cash back to work for your business as soon as you’ve earned it
Businesses in difficulty — bridging the gap between invoicing your customers and getting paid
One off large orders – single or selective invoices can be factors or discounted when the need arises
Which is right for you?
Whether you choose an invoice factoring or 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 invoice 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.
Summary
Even with 30 day terms, quite often invoices are paid late meaning you cannot manage your cash flow effectively. Invoice Factoring or Discounting are great options when it comes to getting your money fast but obviously there are charges associated with it, which we will happily explain. Either way, talk to us today, we can plan and organise the right financial lending solution for your business.