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Factoring Information

Factoring And Invoice Discounting Are Not The Same Thing

Factoring and invoice discounting are two invoice finance tools, that a business can use to quickly raise capital to fund growth.   While both factoring and invoice discounting involve using sales invoices sent to customers, as collateral, to increase cash flow, they should not be treated as different names for the same thing.

Invoices are often overlooked as business assets when looking around for funds, but your sales invoices can provide a flexible source of finance.  Rather than have money tied up in invoices awaiting customers payment; through invoice finance your business can receive an upfront payment, often up to 90% of the gross value of the invoice.  The remaining amount is paid when your customer pays the invoice to the invoice finance provider (less any agreed service fee).

Invoice finance is split into two main areas - invoice factoring and invoice discounting. Both have some major differences, and while one may work for your business, the other may not.   Here we give you a quick view of some differences between factoring and invoice discounting - which one you choose should depend on the particular needs of your business.

  • Invoice factoring is where the factoring company essentially buys your accounts receivables from you.  They take responsibility for the credit collection and recovery of the money owing so this can be a great option for a business that doesn't have the infrastructure in place to collect outstanding invoice payments, freeing up valuable management time!   If bad debt is a concern for your business then bad debt protection or credit insurance is available.
  • With Factoring funding is based on the strength of your invoices.  It doesn't require your business to have produced annual accounts and therefore factoring is an ideal product for new companies.  What's more the funds are available immediately you raise your first invoice and will grow with your turnover.
  • Invoice discounting is more similar to a loan using your accounts receivables as collateral - it provides funding only.   You keep the responsibility for collection from your customers and therefore you will require your own in-house credit control department.
  • If you have invoices due for collection from long standing clients and you are concerned that the factoring company might put undue pressure on them to pay up; you should consider the invoice discounting option.  After all, your business relationship with your customers could be impacted by the behaviour of the factoring company towards them.  As mentioned before, with invoice discounting, you retain ownership of your invoices, simply using them as security for a capital injection, and so you determine how and when you contact your clients to get payment.
  • You should also consider invoice discounting if you don't want your customers to know that you're getting outside assistance with your business cash flow.  With factoring, because the factoring company will collect the money on your behalf, it will be obvious to your customers and they may see that as a sign that your business is doing poorly.  With invoice discounting your customers need not know about your confidential arrangements.

These are some of the differences between factoring and invoice discounting.  For more information please read our factoring buyers guide or for read our article on factoring misconceptions.

If you want to improve your cash flow within 24hours then why not talk to some factoring and invoice discounting companies that could help - get quotes here.

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