Difference Between Invoice Factoring And Invoice Discounting

Invoice factoring and invoice discounting are terms most people usually interchange. Not many people are aware that although they share something in common, which is they both provide funds to a company having troubles with cash flow, they have many things in contrast.

License: Creative Commons image source
License: Creative Commons image source

Although with both methods businesses can convert their receivables to cash through an invoice finance company there are three C’s the two methods differ in: control of sales ledger, collections, and confidentiality.

Invoice Factoring

  • Control of Sales Ledger: The sales ledger is given to the finance company and they have limited control over it.
  • Collections: The business factoring service provider is in charge of doing the collections for the unpaid invoices.
  • Confidentiality: Since there is a third party doing the collections for the unpaid invoices, the customers are aware of this setup. In fact it is best for customers to be informed in a
    dvance so they won’t be surprised of someone else calling them or reminding them about the invoice payment.

This type of invoice finance is good for businesses who don’t have a big enough accounting department or a dedicated collections department who can do the collections for all their pending invoices. If your business doesn’t have the resource and the time to do this, then invoice factoring is a good option for you. Not only will you get an advance for the lumped invoices awaiting payment, the third party company can do the collection in behalf of you.

Invoice Discounting

  • Control of Sales Ledger: The control stays with the company.
  • Collections: It will still be the company who will call their customers to remind them about the invoice and collect the payment due.
  • Confidentiality: Since the company itse
    lf is doing the collections, there will be no need to inform the costumers about the agreement with the third party company. There is confidentiality between the business and the invoice finance company.

Businesses who have the time and manpower to collect invoice payments and balances due to the company can use this financing service for their business. After a percentage of the invoice value, usually 80 to 90 percent, will be released by the finance company after 24 hours of request the remaining amount will be given once the clients have settled their payments. Clients pay to the company as normal process.

With invoice factoring and invoice discounting clearly differentiated, businesses can now better assess which of these they need for their company. Perhaps the most important question the company should ask though is this: “Does the company have enough resources to handle collect

Small companies with just the right number of staff may not have enough manpower. If they still take care of the collections, some of the business operations may get hampered. In this case, companies may be better off going with a company that offers invoice factoring.

Businesses should effectively manage their finances and find a solution to their cash flow problems choosing the best invoice finance suitable to their needs. With the right invoice financing, the business’ development will no longer be hampered and they can take advantage of more opportunities to allow them to grow.

About the Author: Debra Wright is a creative and innovative blogger and online marketing specialist. She uses her wordsmith skills to share her ideas, thoughts, and tips to other people about topics that fascinate her, such as business financing.

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