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When is invoice discounting smarter than factoring?

Invoice discounting and factoring are both well established types of invoice finance. Whichever one you choose, you will be unlocking cash from unpaid receivables which you have sold either to a bank that offers these services or a specialist invoice finance company.

invoice discounting

In order to make the important decision over which makes most sense for your business you’ll need to understand the differences between factoring and invoice discounting. This table should help:

 

Features

Factoring

Invoice Discounting

Money paid for submitted invoices as an advance

Yes

Yes

Added services such as sales ledger and bookkeeping

Yes

No

Invoice debt collection carried out by the factor

Yes

No

Business has control over customer collection and communication

No

Yes

Customer is aware a third party is involved

Yes

No

Customer pays business as normal

No (pays third party)

Yes

Subject to fees, interest and commission

Yes

Yes

 

Invoice discounting or factoring: how to make your choice?

There are a few key deciders which will indicate which option is right for your company:

  • Business objectives:

If your main goal is to undertake a successful period of rapid growth, then factoring is most likely to be the best cash flow solution. This is because money can quickly be obtained without the costs and hassle of chasing payment (the need for working capital being maximum priority), allowing you to focus on business growth and improving cash flow. However, if your priority is customer fidelity and maintaining a good customer service reputation, then invoice discounting may be more appropriate. This is because with invoice discounting you maintain complete control of your credit processes and the financing remains confidential, meaning all customer communication can be to the high standards you require.

  • Business resources:

Your decision may well come down to collateral, credit history and human resources. For example, factoring can be used even for companies with a poor credit history, whilst larger businesses with established accounting departments and good financial history are better suited to invoice discounting.

  • Business size:

Some finance agreements will carry stipulations over the size of business, looking at turnover, profit and other business resources before approving a contract. This is due to the amount of risk an invoice finance company is taking on.

  • Accounting efficiency:

If your business is looking to improve its accounting and bookkeeping processes (or is a small or new business without a proper accounts division yet) then factoring can provide real benefits. This is because the lending company also manages your full sales ledger and collection services as part of the contract.

  • Costs:

Invoice discounting tends to be the cheapest option because of the benefits of outsourcing collections and bookkeeping, though it imposes fewer risks.

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