In invoice factoring, the customer pays directly to the factor-company. When discounting invoices, the customer pays the company as usual. In invoice factoring, services such as the complete sales book and the collection service are available. These services are not included in the bill discount.
Invoice factoring is a type of invoice financing that allows you to “sell” some of your outstanding invoices. In this scenario, a factoring company will immediately pay you around 80 to 90% of the invoice amount. Then, after customers pay the factoring company the full value of the invoice, they'll pay you the remaining amount, minus their commission.
Invoice factoringcan be a great way for companies with a large number of outstanding invoices to resolve cash flow problems and improve revenue stability.
As you can see, invoice factoring and bill discounting are a way to get an advance against unpaid invoices. However, there are a couple of important differences to consider when it comes to discounts on invoices versus. While the invoice discount is a loan secured against outstanding invoices, invoice factoring companies actually buy unpaid invoices directly. This is an important difference because it provides factoring companies with credit control, allowing them to deal directly with customers.
While this means that you don't have to worry about chasing late-payers, it could generate negative perceptions of your business if the factoring company takes drastic measures. It's also worth noting that invoice factoring may have no recourse, meaning that if you sell the invoice to the factoring company and the customer subsequently refuses to pay, you won't be required to refund the money yourself. The discount on invoices is a loan, rather than a sale, which means that the money must always be repaid and, therefore, the discount on non-recourse bills is relatively uncommon. In addition, unlike invoice discount companies, factoring companies will verify their customers' credit before agreeing to buy their invoices.
This can help you identify and rule out those who pay poorly, which should improve your ability to collect your bills in the future. 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. Larger companies tend to prefer a discount on invoices with the ability to operate their own credit control function. Factoring can benefit smaller companies that don't have the same resources and is often beneficial because it frees up a significant amount of time to spend on income-generating tasks. 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 this is true or not, you'll generally want to avoid creating this impression.
Some factoring companies offer no-recourse factoring, in which the company accepts the loss if its customers don't pay. Factoring and discounting are forms of invoice financing that involve a lender releasing sums of cash based on the outstanding sales book. With invoice financing, your company is still responsible for collecting the outstanding money owed by your customers. If your business needs improved and more predictable cash flow, financing with invoices could be a great option.
If this is the case, a discount on invoices would be the better option of the two: you continue to pursue outstanding payments and the fact that you are raising money from your customers' outstanding debts remains confidential. Many companies are left with flat feet, as they often have huge amounts of cash stored in outstanding invoices. Invoice financing, also known as bill discounting or accounts receivable funding, refers to borrowing money against outstanding receivables. You can use any of these types of funding to quickly access capital before your customers pay their bills.
If you think your company could benefit from using factoring or discounting invoices, the last piece of the puzzle is finding the right funding company. Factoring is a type of short-term receivables financing, in which your outstanding invoices are effectively “sold” to a third-party commercial finance company. Factoring is not confidential: the factor contacts its customers to make the payment and the remittance is made directly to the lender. Invoice financing, on the other hand, is a better option for companies that want to maintain control over their accounts receivable.
It can be especially useful for smaller companies that don't have the resources to devote to tracking invoices. Discounting invoices is more common among larger, resource-intensive companies, although this is changing as the model develops. . .