Managing cash flow tends to be the biggest issue when managing a business. It is therefore vital you manage the best ways to ease cash flow and ensure your customers pay you on time. There are, however, a few different types of invoice finance. Whilst the journey may slightly differ for each product, the outcome of freeing up cash remains the same.
Let’s take a look at Invoice Factoring and Invoice Discounting and the differences between the two.
What is Invoice Factoring?
Invoice factoring is a form of invoice financing and it gives businesses the option of selling some of their outstanding invoices. What this means is that a factoring company will commit to paying up to 80 or 90% of the invoice amount instantly. The customer will pay the invoice which will then be paid directly to the factoring company. The customer will then pay the remainder to the business once the fee has been deducted.
What is Invoice Discounting?
This option involves the discounting company lending a certain percentage of the money that businesses are expecting to be paid. What this means is that it can work in a similar way to having an overdraft. After you make a sale and you raise an invoice, the discounting company will lend your business an amount that is equal to your total value of invoices, with a small percentage deducted. Once the payment has been received from your customers, you then pay the loan back as well as a fee that is paid to cover the interest, the cost, and the risk involved. This amount can range from between 1 to 3%.
What are the Main Differences?
Both invoice factoring and invoice discounting enable a business to utilise the money from their unpaid invoices, but there are certain differences that separate the two.
Invoice discounting is a loan that is secured against all of your outstanding invoices, whilst invoice factoring involves a company purchasing unpaid invoices. This is the main difference to be considered because it gives factoring companies complete credit control, allowing them to work directly with the customers.
One other thing to consider is the way in which invoice factoring could result in a situation where the invoice is sold to the factoring company, yet the customer will not pay. This could mean that you are not required to repay this money yourself. Invoice discounting is a loan and not considered a sale like an invoice factoring and that means that the money is required to be repaid, and that means that you will not find yourself in the same position whereby non-recourse invoice discounting comes into force. Invoice factoring companies will also carry out a credit check on those customers of yours who owe money prior to committing to purchase your invoice. This will enable you to identify bad payers and that should make it easier for you to collect invoices.
Get in contact with one of Funding Bay’s experts here to discuss which product is best suited for your business.