Wednesday 31st Jul 2019
Invoice discounting and factoring are both types of invoice financing, which is a catch-all term for a family of asset-based financing facilities that allow businesses to borrow money against the value of unpaid invoices.
To help you get a handle on the right solution for your business, we’ve broken down the key differences below:
Discounting vs. invoice factoring: What are the key differences?
In practical terms, there are four key differences between invoice discounting and invoice financing solutions. These are:
Invoice discounting arrangements normally put you in control of the debt recovery process. This means you’ll be able to maintain your own client relationships, and provide a customer experience that’s in line with your clients’ expectations. There’s also no requirement for you to inform your customers that you are using an invoice financing facility, which means that your clients will never now that you’re raising money against the value of their invoices.
Invoice factoring is a very different story though. Also known as debt factoring, these facilities normally involve “selling” an invoice to your lender: Unlocking a percentage of the total value, but leaving the rest of the debt in your lender’s hands. This means that your lender will be collecting the debt on your behalf. If you use an invoice factoring facility, your clients will normally need to be notified, and you don’t have the same ability to disguise your actions. It also means that you’ll relinquish control of the tone and style of ongoing communications regarding your client’s debts, which may impact the level of customer service associated with your business.
Invoice factoring is often bundled with expert credit management services, which can be a huge boon for small businesses that don’t have the manpower that’s needed to chase unpaid invoices and send payment reminders.
Conversely, invoice discounting facilities allow you to retain control of the collection process. This can be a boon if your business is keen to maintain control of customer communications, but it does mean that invoice discounting is less suitable for businesses that lack a dedicated collections team, or businesses that frequently struggle to collect on overdue invoices.
Generally speaking, invoice discounting facilities are used to leverage cash from your entire ledger, which means you’ll forward every invoice to your lender, and then settle your debts as you collect from your clients. Invoice factoring solutions can provide you with slightly more control: Allowing you to pick and choose the invoices that you “sell” to your lender, which can be very useful if you want to tailor your financing solution to the changing needs of - say - a seasonal business that’s flush with cash in the summer, but hard up during the winter months.
Invoice discounting vs. invoice factoring: which solution is right for my business?
Picking the right kind of invoice financing can be hard, and the right answer often depends entirely on the needs of your business. If you’re struggling to pick between invoice discounting and factoring facility, we’d encourage you to get in touch. When taking out important finance facilities such as this, it’s also worth considering getting independent advice.