When looking for invoice financing, you either go for invoice factoring or invoice discounting. These two are very different options although might appear to have some similarity. There is much difference between the two but the main difference between invoice factoring and financing is credit control. This is part of invoice factoring while is not in invoice discounting.
Invoice financing is an option where cash is released to your business on the customers’ unpaid invoices. The invoices are then transferred to the provider who agrees to take the unpaid invoices and claim them in the future. The two forms of invoice financing are invoice factoring and invoice discounts or discounting.
Invoice Factoring Vs Invoice Discounting
Invoice factoring is where the business uses an invoice of a customer that is pending payment to obtain a certain percentage of the amount before the customers pay the business. In this arrangement the customer will realize of the invoice financing arrangement as the payments will now be made to the factoring company.
In invoice discounting, however, the uses all the invoices in the accounts receivable to obtain a loan like financing. When the customers make their payments to the company, the same business that handled business with them, it pays off the provider with any accrued amount. This is more confidential as the customer will not be able to know whether the company used any invoice
financing method another advantage invoice discounting has over invoice factoring.
While in invoice factoring you lose your credit control, invoice discounting lets you manage your customers’ debts by yourself. This brings in confidentiality. Many businesses then prefer invoice discounting if they are to negotiate deals that require the customer not to know they are using invoice financing as a capital solution.
Other factors that may lead a business to opt for invoice discounting are repeat customers. This customer may require the business to handle its customers own its own as they might delay payments and use promissory notes or IOU to handle payments.
In invoice factoring the risk is extended to the provider, the provider takes the invoice and whether customers will pay or not it is all up to them. Invoice discounting, however, you are still in control of the invoice hence if the customer’s delays payments you might be required to pay off the amount or even suffer the whole lose if the customer will not pay at all.
This might make you opt for invoice factoring as the risk is automatically withdrawn from you to the provider once they accept invoice factoring. This is ideal for small business too as providers are also not afraid of taking risks of small invoices.
Businesses without much time may opt for invoice factoring in contrast to discounting as this gives them more time to handle other business needs other than chasing on late payments. Although this results in it being relatively more expensive, invoice factoring provides a solution to both capital and time. This is also an advantage to small and medium-sized business SMEs as they get the cash
required to handle other business requirements such as paying off due debts, suppliers or employees or financing other LPOs or business deals.
In invoice discounting the deter may require you to finance the whole of your deter book, i.e. all your outstanding invoices, on the other hand, invoice factoring may let you get financing for specific invoices something most businesses will go for. This is because you are not limited in options on the invoices you chose to finance.
The Bottom Line
Invoice factoring and invoice discounts are both methods of business financing and each business has what they really need from getting a capital solution. Factors such as credit control and the risk are more crucial but if the relationship to your clients is strict or delicate then invoice discounting is the better way to go. This is because the customer will be allowed to handle payments with you and will feel more secure dealing business with you without the involvement of a third party on their side something which may customers do not find comfortable.
On the other hand, however, if you do not have any issues finding or retaining your customers or conducting open business, invoice factoring will be the better option. This is because the risk is drawn from you and you do not incur other expenses such as high-interest rates in case the customers take longer than expected to pay the amount required. With invoice discounting, however, you have to focus on ensuring the clients pay the amount due on time so that you may have higher profit margins and at the same time focus on the growth of your business something that might be tough to keep up with.