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Invoice Discounting vs Invoice Factoring

Learn the key differences between factoring and discounting in our detailed guide

Read on below or talk to an expert

What is invoice finance?

Invoice finance is a term that’s used to cover both factoring and discounting, and regardless of the type used, it works in a certain way.

As invoices are raised, your invoice finance provider pays you a proportion of the invoice straightaway. This is then repaid when the invoice is settled, minus any fees and interest, with the balance going to your business.

How do invoice factoring and invoice discounting differ?

With invoice factoring, the lender will provide the funds required and take control of the management of the sales ledger, credit control and any actions regarding unpaid or late payments.

As a result of this, your customers will be dealing directly with your invoice finance provider, so will clearly know of their involvement. Payment of invoices is made directly to the factoring company.

As the facility is managed more heavily by the funder, the increased management cost is passed on to you, meaning it may be more expensive than invoice discounting.

Factoring tends to be most commonly taken on by smaller businesses, usually with turnover of £250,000 or less.

With invoice discounting, the client retains control of credit control and the sales ledger, and simply borrows the money from the provider, meaning you will continue to invoice them directly.

This means that there is no need to inform them of any third-party involvement, and payment is made directly to you. As such, these facilities are completely confidential.

Due to the reduced level of control, funders will want to ensure that the businesses credit control systems are robust and can be relied upon to manage the debtor book. Poor performance in this area may lead to lenders refusing to offer an invoice discounting facility and offering only factoring as management of the debtor book is crucial to ensuring that all invoices are paid as due.

What are the benefits of invoice finance?

There are numerous benefits to choosing invoice finance – here are six for you to consider:

  • Invoice finance allows you to release up to 90% of the value of your invoices on day one, meaning you no longer need to wait 90 days for payment from suppliers.
  • The level of finance available increases as your business grows.
  • Providers of invoice finance are always available to offer sensible advice to help your business and will be able to advise quickly due to their ongoing relationship with your company.
  • Funding can be raised quickly when cash flow becomes an issue.
  • Invoice finance can only be secured on your sales ledger, meaning you don’t have to tie up other assets.
  • It can be a very cheap way to borrow money for your business.

Which product would be best for my business?

The right product for you will come down to the individual details of your business and your customer base. Although there is a slight loss of control when taking out factoring, this can actually be a good thing for some businesses who would benefit from removing credit control from their business.

Factoring does give a higher degree of control and could add strength to smaller businesses, who can be pushed around by larger customers.

Although factoring is more common amongst businesses with a turnover of £250,000 or less, it really does come down to how your business is running currently and what you’re looking for from a lender.

The bottom line

If you’re looking at invoice factoring or invoice discounting for your business and are confused by the many different providers, pricing structures and names for various services, then why not contact ABC Finance Ltd today for simple, honest advice on the best invoice finance lenders for your circumstances.