The Difference between Factoring and Invoice Discounting
We look at the benefits and support networks for invoice discounting and invoice factoring to help you decide what will suit your small business
Both factoring and invoice discounting are financial services that enable businesses to release the funds tied up in unpaid invoices. Both involve a third party company advancing money against outstanding debtor balances.
There are clear differences between factoring and invoice discounting:
- With factoring the third party company takes control of the sales ledger, chasing customers for settlement of invoices and managing the credit control of the business. They are also responsible for processing the payment of invoices, meaning that your customers are fully aware of your business contract with a factoring company.
- With invoice discounting your customers are unlikely to be aware of your relationship with a financing company. You maintain responsibility for the sales ledger, payment chasing and invoice processing.
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The advantages of factoring and invoice discounting
Although there are key differences between factoring and invoice discounting, the benefits are the same:
- Releasing up to 90% of the value of outstanding invoices within 24 hours
- Funding can be secured without requiring other assets
- Cash is freed up to either lessen cash flow problems or grow the business
- Supplier invoices paid promptly will increase your power to negotiate discounts
- Funding levels increase with your turnover
- Both services are competitively priced
- Factoring and invoice discounting providers often offer excellent business advice
The additional benefit of factoring is that it comes with a complete credit control and collection service, enabling you to focus time and resources on other areas of your business.
An additional advantage of invoice discounting is that responsibility for credit control and debt collection remains with you and your customers are not aware of any cash flow problems you maybe having.
Who uses factoring and invoice discounting?
The main areas of industry that utilise factoring and invoice discounting are:
Factoring and invoice discounting can solve the problems associated with slow payment.
Similarly, factoring and invoice discounting can prove beneficial for:
- Business startups – providing flexible finance to get new
ventures off the ground.
- Growing businesses – making your cash work harder for you.
- Struggling businesses – bridging the gap between invoicing and receiving payment.
What’s the best invoice finance solution?
It depends on you, the nature of your business and your particular needs.
Business size and the management resources of your sales ledger will be key factors in determining whether factoring or an invoice discounting facility is most appropriate for your business.
Typically factoring works better for smaller businesses. A main reason for this is the collection service and increased credit control that factoring provides.
For larger business where greater resources, whether human or information, exist, or if you want your company to deal with debt collection, invoice discounting is likely to be more appropriate.
Free Expert Advice
If factoring or invoice discounting are solutions you’re considering for your business, Touch Financial can help you find out how such options could benefit you. Only when they understand your entire needs will a recommendation be made.
This article was contributed by Touch Financial, an independent factoring broker working with over 20 of the UK’s leading factoring companies.