Business support has been vital throughout the last 18 months. As life slowly returns to normal, businesses will continue to need a financial lifeline.
Invoice factoring and invoice discounting are two ways that a business can quickly access money.
We decode the difference between factoring and discounting and outline some benefits and drawbacks of each.
What is invoice factoring?
Invoice factoring is a way for businesses to generate funds by selling off invoices to a firm that specialises in factoring.
Invoice factoring providers will loan a business money against the value of said business’s customer invoices.
Then, when customer invoices are paid, the funds will go directly into the account of the factoring company.
What is invoice discounting?
For businesses with cash flow tied up in unpaid invoices, invoice discount can provide instant access to much needed funds.
Simply, when businesses use invoice discounting, they will receive a percentage of the invoice total from an invoice finance firm. Giving the business the cash the need, when they need it.
Factoring vs discounting
The fundamental difference between factoring and discounting is autonomy.
With factoring, your customers are likely to know that their payment will be going to an invoice finance provider.
Discounting allows you to retain autonomy and control over your invoice and liaise with your customers about payments.
The main benefit of either type of invoice finance is that it gives businesses greater access to funds when they need them.
Which type better suits a business depends on that particular business’s needs.
Additionally, invoice factoring and discounting could be more of a benefit for businesses than long-term loans with higher interest rates.
All types of invoice financing – whether it be factoring or discounting – charge interest rates.
A business considering this finance will need to consider if they can make the interest repayments set out in their contractual agreements.
Factoring also has the added drawback that customers will know you are relying on financing companies. This could tarnish your reputation as a credible business.
How to find the support you need
Some factoring companies have hit the headlines recently, so it is important to find the right one.
Do your research on the factoring or discounting firm you want to use. Read all your terms and conditions closely and only sign a contract you are happy with.
Find one that is signed up to the Asset Based Finance Association (ABFA) to ensure they adhere to a code of conduct consistent with their work.
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