You continue to manage your own credit control and debt collection for customer accounts, helping you build and maintain closer relationships with your customers. Discounting invoices is cheaper than factoring. The director is likely to take fewer risks with more modern providers. Overall, discounting invoices is a riskier proposition for lenders than factoring.
As a result, the discount on invoices is mainly used by large companies with a stable and reliable customer base. By contrast, invoice factoring tends to be used by smaller companies because of its accessibility, rather than its choice. Ultimately, the best invoice financing solution for small businesses depends on your company's needs and circumstances. A factoring company is responsible for collecting the invoice in full.
You don't have to wait for the company to pay. The factoring company will wait for the bill to be paid. On the one hand, companies that owe you invoices may think that if you're taking cash flow into account, this means you have cash flow problems. Whether it's true or not, you'll usually want to avoid creating this impression.
Both types of bill financing allow you to turn your accounts receivable into an easily available source of funding. However, there are several differences between these solutions. However, with the invoice discount, you are responsible for your sales book, processing invoices, and finding customer payments. The discount on invoices is often preferred by larger, established companies that already have credit control resources.
Discounts will also be a more preferred option for those who want to protect key customer relationships. In invoice factoring, the factor (financial company) is responsible for collecting invoices. When discounting invoices, the company itself assumes the responsibility of collecting them. This is fine for many companies, but others will prefer to fund specific invoices, which is easier to do with factoring.
Once you have submitted the factoring invoice, the finance company assumes the responsibility of collecting payment from its customer. Credit monitoring services are included as part of bill factoring, but are not included with discounts. There is also a form of invoice financing called selective invoice financing, or “spot factoring”, which allows you to choose individual invoices, specific customers, or specific projects to finance. The discount on invoices is generally chosen by established commercial or collection departments; others opt for factoring.
The factor (financial company) then buys the invoices for a percentage of the total value, between 60 and 80%. Both factoring and invoice financing work best for companies in industries that deal with large wholesales. You should analyze these differences before choosing between factoring and discounting invoices. So how does the invoice discount work? After generating invoices for goods or services, the company that makes discounts lends your company an amount proportional to the total value of the invoices, minus a small percentage.
Like factoring, invoice discounting is a way of borrowing in the short term against outstanding invoices. This is useful if your company doesn't meet the requirements for a discount on invoices, but you want to maintain control of your sales book. Without credit control, the lender has less control over whether their customers will pay on time (or pay), which means they take more risks by advancing cash based on these bills. If your company has problems with working capital due to the gap between issuing an invoice and receiving payment, it will be a good candidate for invoice financing.