Differentiating between Invoice Factoring and Invoice Discounting
Introduction
In the realm of managing cashflow for businesses, particularly small and medium-sized enterprises (SMEs), two prominent solutions stand out: invoice factoring and confidential invoice discounting. Both types of facility offer ways to unlock the value of unpaid invoices, providing a much-needed cash injection to businesses. However, despite their shared objective, there are fundamental differences between the two that every business owner should understand to make an informed decision about which option suits their needs best.
Invoice Factoring
Invoice factoring is a form of borrowing where a lender releases a percentage of the unpaid invoice value. In this arrangement, the lender holds the responsibility of collecting payment from customers. The process typically involves the following steps:
- Send invoices to your chosen lender: Invoice your customer as usual, and submit a copy to your chosen lender.
- Receive funds: The lender releases a certain percentage (up to 90%) of the invoice value.
- Customer pays their invoice: Your customer then pays their invoice within the terms of their credit agreement.
- You receive the remaining funds: Once your customer has paid, you then receive the remaining percentage value of the invoice, minus the lender’s fees.
Key Features of Invoice Factoring
- Lender handles credit control
- Access cash quickly, usually the same day or within 24 hours
- Facility is fully disclosed
Invoice Discounting
Invoice discounting is similar to invoice factoring in it’s process, but the main difference is the disclosure of the facility. Confidential invoice discounting ensures the facility remains confidential, and therefore the credit control remains with the business. Here is an example of what a confidential invoice discounting facility process looks like:
- Send invoices to your chosen lender: Invoice your customer as usual, and submit a copy to your chosen lender.
- Receive funds: The lender releases a certain percentage (up to 90%) of the invoice value.
- Customer pays their invoice: Your customer then pays their invoice within the terms of their credit agreement. It is the responsibility of the business, not the lender, to ensure the customers settle what they owe.
- You receive the remaining funds: Once your customer has paid, you then receive the remaining percentage value of the invoice, minus the lender’s fees.
Key Features of Invoice Discounting:
- Businesses keep credit control in-house
- The facility is kept confidential and customers are unaware of the financing agreement
- Cash is released quickly, usually the same day or within 24 hours
Key Differences:
- Credit control: With invoice factoring, the lender assumes responsibility for credit control whereas with invoice discounting, the business retains control over this process. Therefore, invoice discounting allows businesses to maintain direct relationships with their customers. However, it may be helpful for a business if the workload of chasing invoices is taken away through a factoring facility. It is important to weigh up the advantages of each type of invoice finance facility to determine which is most beneficial for your business.
- Confidentiality: Invoice discounting is undisclosed and customers will not be aware the business has a invoice finance facility. Invoice factoring, on the other hand, is fully disclosed and customers will be able to see that the business is using a factoring facility.
Conclusion
In conclusion, both invoice factoring and confidential invoice discounting offer viable solutions for businesses seeking to improve cashflow. The choice between the two depends on whether the business wishes to keep credit control in-house and whether they want the facility to be disclosed. It is important to consider the above information in choosing a type of factoring facility. It is also crucial to work with a specialist invoice finance broker who can help you navigate this process and find the most suitable lender for your business and your needs. At Contact Business Finance, we can guide you through the process by getting to know you and your goals for your business – we have access to the whole market and can find you the most suitable deal. We are based in Wolverhampton in the West Midlands but work with companies across the UK. If we can help, reach out to us on 01902 219260 or email info@contactbusinessfinance.co.uk.