Invoice Factoring and Invoice Discounting: Which Solution Works?

Posted by Gil Oliva on Tue, Jul 12, 2016 @ 09:00 AM

Like many businesses juggling multiple 30 or 60 day outstanding invoices, you may find your business financially strained, especially when some customers wait up to 90 days to reconcile their bills. This may leave your business with limited working capital to cover administrative overhead, reduce existing debt, or even cover normal payroll costs. This is a situation that may be helped through invoice factoring or invoice discounting.

What is Invoice Factoring and Invoice Discounting?

Invoice factoring and invoice discounting are both financial services in which money from invoices that have not yet been paid is released by a provider who agrees to advance funds against a company’s outstanding debtor invoices. Businesses prefer invoice factoring and invoice discounting because, rather than wait up to 90 days for customers to pay, up to 95% of the outstanding invoice value is received within 24 to 48 hours after submission to a factor. This can be helpful to small businesses and startups who have limited credit history, and to larger businesses that have large quantities of outstanding invoices. Factoring looks at the company’s clients’ financial soundness, whereas banks and financial lenders typically focus on a company’s creditworthiness as part of the approval process when evaluating a loan application.

Differences Between Invoice Factoring and Invoice Discounting

Invoice factoring and invoice discounting are very different.With Invoice Factoring the provider:

  • takes credit control
  • takes control of your sales ledger
  • is responsible for collecting settlement of your invoices

With Invoice Discounting the business:

  • controls its own sales ledger
  • is responsible for collecting customer payment

Another difference involves confidentiality. With invoice discounting, your customers remit payment directly to your business, without knowing the business is working with a third party. While with invoice factoring, the business customer remits their payment directly to the third party provider, which means they are likely to be aware that the business has a factoring arrangement.

Yet another difference lies in the fact that with factoring, since your business outsources ledgers to a third party, the accounts team doesn’t have to be responsible for things like credit checks. However, when utilizing invoice discounting, since you handle the invoices yourself, your company must have an exceptional, established sales ledger, credit-checking, and credit control process.

The Benefits of Invoice Factoring and Invoice Discounting

  • A high percentage of the value of your business’s outstanding invoices is acquired almost immediately
  • Cash is free to be used to grow the business or overcome cash-flow issues because your business is no longer waiting on incoming funds
  • No other assets are required to secure funding because eligibility is based more heavily upon the creditworthiness of your customer

Additionally, invoice factoring can assist in providing credit control and debt collection service, which enables your company to focus time and resources on other aspects of your business.

Challenges Invoice Factoring and Invoice Discounting Can Resolve

  • Cash Flow Interruptions – late-paying customers can often cause a cash flow crisis for your business, leaving you unable to keep up with operating costs. Luckily, the nearly immediate cash received when using factoring can prevent that.
  • Changes in Business – unplanned change can affect your working capital ratio and put your working capital in jeopardy, which can delay your ability to take on new clients, pay suppliers, or invest in necessary equipment.
  • Unexpected Rapid Growth – there could be a cash crunch due to the gap between sales and invoice collection, you may have to hire new employees to help with the expanding workload, your productivity could suffer from having to operate at faster speeds with rapidly-hired, untrained new/temporary team members, or you might have to invest in new equipment; these are just a few examples of challenges unexpected growth can cause, all of which are much more difficult to tackle while all of your capital is tied up in unpaid invoices.
  • Expected Planned Growth – everything is on track with your projected plan for expansion. You’ve prepared for the pitfalls of unexpected growth. The only problem is that the money to match the expansion, which you need to invest in resources like a workforce and equipment, is not forthcoming due to slow-paying clients. This can hamper your plans and you might lose your window of opportunity for growth, leaving your business with a significant debt.

Is Invoice Factoring or Invoice Discounting Right For You?

Many companies are now opting for alternative finance options like factoring and invoice discounting. Unlike traditional financing options, which are generally pre-agreed and rigid, invoice factoring provides flexibility as business grows.

Many businesses prefer invoice factoring to discounting because of the transparency. Great communication and professionalism is the hallmark of any great business, and invoice factors get your business the financing it needs, while keeping open lines of communication with your clients and maintaining the great relationships you’ve already built. If you are curious about invoice factoring and would like more information, call Bay View Funding today at (888) 229-9993 or contact us online.


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Topics: Invoice factoring, Cash Advance, Working Capital, Business Financing

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