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Invoice Discounting vs Invoice Factoring

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Invoice finance is offered in two forms: invoice factoring and invoice discounting. Both are facilities that release working capital into your company – The capital you need to grow your business.

  • They both provide a fast repayment against the sales ledger
  • They both increase working capital
  • They both improve cashflow

But which one is right for you?

How Invoice Factoring Works

  • You invoice your customers and send a copy to the factoring company
  • The factoring company pays you up to 90% of the value of the invoice within 24 hours
  • The factoring company will also chase up your customers and enforce credit control procedures, collecting the full balance of the invoice
  • When an invoice is paid, you receive the balance of the invoice as a drawdown – less any fees and charges made by the factoring company.

Invoice factoring is great for smaller businesses that don’t have a full team of credit controllers, chasing up payments from slow-paying customers.

This is because the factoring company takes care of all the credit control, issuing of statements and chasing letters as well as those ‘when are you going to pay?’ telephone calls.

A factoring agreement might also include some degree of credit insurance against bad debt.

The overriding factor is that your customer will be completely aware you have a third-party factoring company involved in your credit control as they will now be paying them directly.

How Invoice Discounting Works

  • You invoice your customer and forward a copy to the invoice discounting provider
  • The invoice discounting provider forwards you up to 90% of the value of the invoice within 24 hours
  • The responsibility of credit control and chasing invoices stays with you
  • When the invoice has been paid into your account the invoice discount company releases the remaining value of the invoice back to you – less fees and charges.

While invoice discounting can be a great boost for a growing company to provide cash to fund growth, it can also be the right type of finance facility for larger companies with dedicated in-house account teams. Maintaining control of credit is vital for many companies and if your business already has a sound credit team in place then having a factoring company might not be best for you.

Invoice discounting turns your debtors into quick-paying customers allowing you to turn cash faster – extracting the maximum amount of working capital from your business through the efficient working of your sales ledger.

In some cases where a company has little or no debt, invoice discounting can allow it to get a big one-off benefit by releasing cash to fund expansion, or invest in larger projects.

Invoice discounting can certainly keep your cash flowing, allowing you to react quickly to opportunities, without ever changing the way that you invoice your customers.

Whether you use factoring or invoice discounting, if a customer still doesn’t pay in the required times scales, then credit limits are called in which can lead to restriction of the available funds you can drawdown.

Still, factoring and invoice discounting help thousands of businesses release funds that are tied up in unpaid invoices. The main difference between them is that invoice discounting is confidential and factoring is not. But there are other, more subtle aspects, to consider before choosing which is best for your business.

If you are looking for an invoice discounting facility, or want to know more about our invoice finance options, contact Funding Guru today or request a call back for a free, no-obligation chat with a member of our team!


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Jeremy Baker

Expert in content, funding research & finance marketing. Jeremy has over 8 years of experience, providing finance firms with outstanding written content for UK audiences.

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