What is the difference between invoice factoring and invoice discounting?

Invoice factoring and invoice discounting are both types of asset backed finance aimed to help businesses release cash which are tied in invoices. A funder can be a bank, alternative financier, or invoice factoring company who lend against an outstanding debtor balance or accounts receivable.
For both factoring and discounting, the end result is the same; a cash injection into the business to boost working capital requirements (be that meeting the next payroll or covering business expenses). Invoice finance is a diverse financial solution, whether you’re a recruitment company paying employees but still awaiting for payment of client invoices, right through to a construction company looking to start a larger project when you’re still awaiting late payment from the previous project.
The main difference between factoring and discounting lie around whether the financier or the company owns the sales ledger and who ultimately takes payment from the end customer.

With invoice factoring, the financier is responsible for the businesses sales ledger and collecting the debts off the customer. Often customers will be required to pay the factoring company directly rather than to the business that provided the services or goods originally. As we’ve mentioned in our invoice finance guide, there’s recourse and non-recourse invoice finance. If the customer fails to pay, with recourse contracts, the business bears the cost, and with non-recourse contracts, the funder or factoring company takes on this responsibility.

With invoice discounting on the other hand, the business manages the sales ledger and collects payments as normal from the end customer. The main benefit of this, is that the end customer does not need to know that the business has a financing arrangement in place, which could help trust and the reputation of the company.

At Trade Finance Global, we’re experts and the leading introducers for invoice finance, helping businesses access the most appropriate form of commercial finance to solve their business needs.

Table of differences between factoring and discounting

Invoice factoring Invoice discounting
Used for small – medium sized businesses, with turnover under £500k/td> Used mainly by medium – large businesses, with turnover over £500k
The invoice factoring company has control over the sales ledger The business requesting finance has full control over the sales ledger
Factor collects payments and chases customers on behalf of the business Normally a confidential facility – customers do not need to know that an invoice discounting facility is present
Often cheaper than invoice discounting Can be more expensive than invoice factoring, especially if the invoice finance is non-recourse (i.e., funder takes the risk of non-payment from the end customer
Invoice factoring is useful for one-off single invoices Whole or selective invoices can be used against one or numerous invoices respectively
Credit control and collection services allow the business the ability to focus on other time and resources Discounting facilities can fit and work alongside accounts payable, finance and accounting teams within the company

The benefits of invoice finance (for both discounting and factoring)

Invoice finance is particularly popular because it enables businesses to advance payments from outstanding invoices quickly. Invoice financing also requires no assets (e.g. commercial property or a personal guarantee) in comparison to getting finance from traditional sources. Being able to negotiate favourable payment terms to the customer means you can develop a better business relationship and also take on new contracts with larger customers, without worrying about cashflow issues.

In summary, the benefits of invoice finance are as follows:

  • Release around 80-90% of the value of invoices straight away
  • Other assets are not needed to access invoice finance
  • Can be used even if you’ve been previously rejected from the bank, might not be creditworthy, or have only recently started trading
  • Competitive pricing
  • Helps bridge the gap between invoicing the end customers and receiving final payment

Invoice finance serves numerous industries which have historically been difficult to fund. These industries include:

  • Recruitment
  • Pharmaceuticals
  • Manufacturing and construction
  • IT (software, hardware and data)
  • Consultancy services
  • Marketing and design agencies
  • Wholesale and non-perishable goods

An example of invoice factoring

As an example, let’s assume a business has issued a £100,000 invoice to a large customer with 60-day payment terms.

A factoring company might immediately advance you 90% of that amount, which is £90,000, holding back £10,000 until the customer pays.

The factor might then chase the customer for payment of the invoice, who pays the factor in 6 weeks.

A financier might charge a flat 2% factoring fee to cover administration, interest and charges, which is £2,000. In addition, a 1% per week factoring fee may apply, so the additional fees are £6,000. Once the customer pays the invoice to a customer they’ll receive the remaining £2,000 in the final instalment.

So what next? Introducers can be a great first start if your business, no matter how big or small, is looking for invoice finance. Get in touch with our invoice finance specialists, or find out more about invoice financing in our guide here.

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