Invoice Factoring vs. Invoice Discounting

Invoice Factoring vs. Invoice Discounting

June 07, 2017 | Sara Mohn
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    Invoice Finance, so receiving funds against account receivables, can be divided into “Invoice Factoring” and “Invoice Discounting”. Both help companies to improve their cash flow and to receive revenue earlier when customers pay on terms.
    But how are they different from one another? What advantages does invoice discounting have over invoice factoring?
    This post will explain exactly that.

    Invoice Factoring

    Factoring is the traditional method of selling one’s account receivables and is provided by many banks and factoring houses.
    Factoring means the SME gives up all of its collection rights of all its invoices to their factoring firm. Thus, they factor their full ledger without the choice of holding back certain invoices which makes factoring rather rigid and removes all account receivables from the SME’s balance sheet.
    Factoring firms usually demand debentures or personal guarantees to protect themselves in case of default. They also require you to enter long-term contracts associated with large fees for terminating it early.
    Moreover, factoring agreements may negatively impact you relationship with your client as the factoring firm deals with your credit collection instead of yourself.
    Also, be aware that you may be paying more than you should due to cross selling of products, especially when you are factoring with a bank. The costs associated with opening a bank account, insuring your factoring agreement and other bank charges can increase your cost of financing significantly.

    Our advice?

    Don’t let them fool you with an initial low cost offer, question all costs associated with the contract.
    If possible, get help from a financial advisor to help you choose the right facility and to avoid as many additional expenses as possible.
    It is easy for factoring firms to hide their fees and costs in complicated writing so ask about anything you do not understand and make them clarify it for you. It is important to also consider invoice discounting instead, in the following, we will lay out the advantages of invoice discounting over factoring.

    Invoice Discounting

    Just because factoring is the traditional way to do it, doesn’t mean it’s the right thing for your business. Nowadays, there are newer platforms serving the same purpose as old factoring agreements whilst creating greater value for users.
    This is often achieved through online platforms allowing the elimination of long and bureaucratic processes. Processes run fast and smoothly and everything is done online or through the phone to speed up communication and to eliminate delays.
    The platforms also ensure you are always aware of what you pay per transaction. You are shown the price and easy-to-understand pricing structure before agreeing to any transaction and if you deem it too expensive, you can always reject the sale of that particular invoice as invoice finance allows you to sell certain invoices whilst withholding others.
    Prices shown are very customised, each invoice is given a separate price, depending on its payment terms and debtor.
    Moreover, there are no long-term contracts associated with invoice discounting, you can just use it for as long as you need it.

    Overall, invoice discounting is a more flexible and personalisable alternative to factoring which can be useful if you are not in need for invoice finance all the time.
    If you prefer to receive finance against all of your invoices at the same price each time, factoring may be more suitable to you.

    Here is a summary of the differences:

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    If you decide that invoice discounting may be the right thing for your company’s cash flow problems or that it would just be helpful to receive funds earlier on, feel free to contact us here at Novicap – we will help explain how it all works and how you can get started!

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