Invoice discounting and factoring are two types of service offered by many financial businesses to allow a company to release any funds tied up in unpaid invoices. They are incredibly useful in certain industries, such as construction and recruitment, where the money to pay contractors may not come through until clients have paid up.
This can take anywhere between 30 to 90 days in some cases, which is not ideal. There are many similarities between invoice discounting and factoring. It is important to know the differences however, to ensure you pick the best option. Here are three of the main ones.
- Responsibility for Collecting Payment
Using either invoice discounting or financing will result in your business receiving the money it is owed by clients and customers upfront, with a discount taken off by the company offering such services. It will still be someone’s task to collect client payments when they are due.
With invoice factoring, the third party (such as Touch Financial) takes on the responsibility of collecting and chasing up customers to settle their invoices, after releasing the funds. Whereas with invoice discounting it is still your company’s responsibility to collect any invoice payments owed. Choosing one will depend on how much responsibility you still desire.
- Control Over Sales Ledger
In a similar vein, with invoice factoring it is the factoring company that takes charge of your business’ sales ledger. This means all your clients will be aware that you are using an invoice factoring company.
For some companies this may be seen as a negative, so invoice discounting would appear far more appealing. Here your business maintains control over all its sales dealings, with no need to inform or allow clients to find out that you have hired an invoice financing firm. In some cases that could bring out client worries regarding your company’s finances.
The customer is therefore aware with invoice factoring that a third party company has been enlisted to help out, with no confidentiality involved. Whereas with invoice discounting the customer is not aware that any invoices have been discounted.
Therefore customers will not know about any cash flow problems your business may be experiencing, or be put off from using your services in the future due to them. Consider these three important differences between the methods of invoice financing before deciding which solution to use with your business.