Invoice Discounting and Invoice Factoring: Overview

Invoice discounting (read more on here) and invoice Factoring are both short term financing for businesses where it releases funds tied up in account receivables / outstanding invoices. What are the similarities between the two then?

Similarities 

  • Help businesses with their cash flow challenges, providing some relieve for their cash flow gaps rather than be at the mercy of customers to pay
  • Both speedily advance cash between 1 to 3 days and up to 90% of the outstanding invoice values
  • Funding can be obtained without needing asset as security
  • Facility limit is adjusted according to funding requirements. As companies grow, funding requirements increase
  • Both provide competitive pricing

 

Differences

Factoring is usually used by smaller businesses. For example, a start-up company or a small business. Discounting is usually used by larger and more established companies.

  • Factoring only offers disclosed facility which means that the end customer will be made aware of the factoring arrangement. In addition, the payment needs to be made directly to the factoring company.
  • The Factoring Company may take control of the sales ledger, includes invoicing, collections and credit control of the business. This could be seen as beneficial for some small businesses as an additional value added service but not for larger companies.  On the contrary, in invoice discounting, the end customer will not be made aware of the involvement of the finance company nor will they have anything to do with the operations of the invoice finance company who have traded its invoice. Hence this allows the business to continue to grow their relationship with their customers, as well as to operate as normal while the invoice discounting facility adapts with the business as it grows.
  • Spot factoring is offered by some factoring firms which allows businesses to selectively factor their outstanding invoices rather than its entire sales book. However, this is not standard practice, as most traditional factoring companies only offer a whole turnover facility. For invoice discounting, businesses have the advantage and flexibility to choose either whole invoice or selective invoice discounting.

 

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