Invoice factoring and invoice discounting – what’s the difference?
Unpaid invoices can be problematic for all businesses, big or small. The pressure of managing cashflow and the time taken to chase outstanding debts can be a challenge, not to mention stressful.
Which is right for you?
If you have an in-house accounts team and you want to keep your sales ledgers confidential then Invoice Discounting is probably the best route for you.
For smaller businesses with no or limited in-house accounts team and no time to chase invoices then Factoring is usually the preferred option.
Invoice discounting - how it works
The lender will give your business 80-90% of the invoice value, usually within 24 hours. Once the full value is settled by your customer, the invoice discounter pays the remaining 10-20% less any charges. With invoice discounting your customers will not be aware of your involvement with a financing company as you maintain responsibility for payment chasing, credit control and invoice processing.
Benefits in brief:
- Immediate cash flow advance
- You stay in charge of sales ledgers
- Your finance funding remains confidential
Factoring – how it works
Factoring is a completely outsourced credit control and collection service. The factoring company provides a cashflow advance (an agreed % of the invoice value, usually 80-90% of total amount). They will then chase your customers on your behalf to settle all invoice payments and manage the credit control of your business. They are also responsible for processing invoices meaning that your customers will be aware of your involvement with a factoring company. Further to this, they are responsible for paying the final percentage on settlement of the invoice.
Benefits in brief:
- Long term cashflow injection
- Debt collection is outsourced allowing you to focus on the positive aspects of your customer relationships
- Your valuable time is freed up from chasing unpaid invoices to concentrate on business development