Those businesses which invoice their customers to receive payment may well have heard of invoice finance. It is a handy service which is offered by third parties to businesses, allowing them to bypass the lengthy payment waiting times (usually between 30-120 days) which must be endured once an invoice has been issued.
There are different types of invoice finance, although the differences do tend to be fairly meagre. As such, here is a comparison between two of the most popular types, known as invoice discounting and invoice factoring.
The process of invoice discounting goes something like this. A business will ask a third party lender to forward them money equal to the value of an invoice they have just issued, and the lender will then forward a large proportion of the it (minus their fee) to the business.
The business will then pursue the invoice payment from the customer until it is paid in full to the lender. Once this is accomplished, the lender will then pay the remaining portion of the invoice’s value to the business.
The process of invoice factoring also involves a business applying to a third party lender in order to receive funds for invoices they issue. The process then follows a similar path, but it is the factoring company which then takes control of the payment chasing, credit control and so on.
This means that once the invoice has left the business which is issuing it, it is no longer their responsibility, and they do not have to spend time and resources managing the invoicing process.
Given that these types of invoice finance are very similar, the advantages of one over the other are, once again, fairly small, but they do make a difference. The main advantage of invoice discounting is that the business using it does not have to explicitly state that they are using it, given that their customers are still dealing with them (rather than the lender).
With invoice factoring, the customer deals with the factoring company, so in most cases it cannot be a confidential part of operations. However, they do enjoy the benefit of being able to direct time and resources to other areas of the businesses which would otherwise be taken up by chasing payments.
Which Businesses Are They Suitable for?
Any business which invoices customers can benefit from both these options, but those which are smaller and have more limited funds, resources and time are more likely to use factoring. This is because they are far more likely to be accepted for factoring rather than discounting, as invoice discounting companies often only accept companies with high turnovers (£100,000 or more).
Given that discounting gives virtually no control to the lender, it is easy to see why they would favour factoring for smaller, riskier businesses, as it gives them far more security/peace of mind.
These are the main differences between invoice factoring and invoice discounting. Invoice finance as a whole is an incredibly useful service which many businesses currently rely on, or may do so in the future, so it pays to know some of the finer details.