Invoice Discounting vs Invoice Factoring

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Invoice finance is largely made up of two products, invoice factoring and invoice discounting, this article looks at each product and briefly discusses the differences between the two.

Both products are designed to release vital cash into your business using unpaid invoices and are mainly used to improve cash flow or to fund a vital expansion for your company. Many companies, such a recruitment and haulage companies will often run on factoring at all times, as a method of controlling cash flow. Almost all income will be paid on 60-90 day invoices, which can cause strain on company finances.

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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 borrowing 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.

The Differences Between The Two Products

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 £500,000 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.

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.

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 £500,000 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.

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