Factoring or Invoice Discounting?
It can be hard enough for small businesses to keep up with invoices. And knowing which type of finance to employ to help you keep ahead is tricky. If you’ve been thinking about factoring or invoice discounting (or even if you haven’t), it’s worth looking at the difference between each product.
Factoring and discounting are two different types of invoice finance that help a business release cash tied up in outstanding bills to help keep up with growth. A funder could be a bank, a specialist invoice finance company or, even one of the new breeds of alternative financiers operating a hybrid or simple version. Whatever the origin of the funder, they will essentially provide cash in the same manner. That is offer you a lending facility against the value of an unpaid invoice(s)-giving businesses more financial flexibility whilst getting access to their money when they need it most!
What is the difference?
For both factoring and discounting, the result is the same; a cash injection into the business to boost working capital (be that meeting the next payroll or covering business expenses). Invoice finance is a diverse financial solution, whether you’re a recruitment company paying wages but still waiting for payment of client invoices or, a printer having delivered the printed material but still waiting to be paid or, a haulage company that has moved goods from A to B and still waiting for the cash to be delivered.
Factoring and discounting are both ways for businesses to receive money, but they differ in who collects in the outstanding sales ledger. Factoring means that the funder will be responsible for all aspects of credit control including collecting payments from customers, raising monthly statements, making chasing phone calls and sending collection letters etc. But they do not have any say in who you work with or which projects you take on. Many, wrongly, believe that when you sign up for invoice finance you lose control of some of the most critical business decisions, but you remain in control … always.
With invoice factoring, you must ensure that your chosen provider will do the job you are paying them to do. The financier is responsible for all aspects of the sales ledger and collecting debts off the customer. If they fail to do this professionally across all your customers, then your debtor days can increase (how long it takes for your customers to pay) and therefore your borrowing costs could grow. At Partnership Invoice Finance, as a specialist of long-standing and a full member of UK Finance, we understand how to undertake expert credit control. Across all the ledgers we manage, we average collecting outstanding monies owed within 39 days. As we’ve mentioned in our invoice finance guide, bad debt protection can also be included in this service to help cover the potential loss if your customer fails to pay.
With invoice discounting, the business manages its own sales ledger and collects payments as normal from the end customer, which are paid into a Trust Account held jointly by the funder and the business. This service tends to therefore be used by larger businesses with established in house credit control teams that can show that they collect payments on time. This can be offered on a discrete (confidential) basis or disclosed to the end customer, again either with or without bad debt protection.
|Generally used for small to medium-sized businesses, with a turnover under £1mn. Though some substantial companies also use and benefit from the outsourced service.
|Used mainly by medium to large businesses, with turnover over £1mn and smaller companies with established credit control procedures.
|The invoice factoring company has control over the collection of the sales ledger.
|The business requesting finance has full control over the sales ledger.
|Factor collects payments and chases customers on behalf of the business and therefore facility is fully disclosed (a few providers will also offer this on a confidential basis).
|Can be either confidential(customers do not need to know that an invoice discounting facility is present) or disclosed.
|Can be more expensive than Invoice Discounting as it includes an additional service, though often at a price cheaper than trying to do in-house.
|Generally, less expensive than full factoring and priced, in part, in line with perceived risk in the advance.
|Credit control and collection services allow the business to free up time and focus on sales and internal improvements as required.
|Discounting facilities can fit and work alongside accounts payable, finance and accounting teams within the company.
|The ledger can be insured.
|The ledger can be insured.
The benefits of invoice finance (for both discounting and factoring)
Invoice finance is particularly popular because it enables businesses to receive payments in advance of when invoices fall for payment. As an Invoice Finance advance is secured on the outstanding sales ledger, businesses (and Directors) with no other tangible assets can obtain significant funding lines that would not be possible otherwise. This access to cash can lead to being able to negotiate favourable payment terms with a customer and means you can develop a better business relationship, gain a competitive advantage, and take on new contracts with larger customers, without worrying about cash flow issues.
Invoice finance is a flexible funding solution for businesses that need to level out cash flow during times of growth or to fund innovation. It’s reliable, grows as you grow, and is extremely affordable. In summary, the benefits of invoice finance are as follows:
- Release around 80-90% of the value of invoices straight away, receive the balance (fewer fees) when your customer pays.
- Other assets are not needed to access invoice finance
- Can be used even if you’ve been previously rejected from the bank, might not be considered creditworthy, or have only recently started trading
- Competitive pricing
- Helps bridge the gap between invoicing the end customers and receiving final payment
- Helps manage peaks and troughs in cash flow as you grow
- Low-cost finance for growing businesses
If you would like to know more or have any questions about invoice finance in general, please contact us.