Differentiating Between Invoice Discounting and Factoring

Posted on: 20 September 2016

If you are a business owner and your clients are taking longer and longer to pay up their invoices, you may find yourself feeling quite stressed. Unfortunately, late invoice payments are a common occurrence among most businesses. Typically, it is not a guarantee that just because you have a profitable business you will also have steady cash flow. So how is it that you could be having a profitable business yet you have unreliable cash flow finance? For one, most invoices allow customers a grace period of a couple of months before they have to pay up. On the other hand, though, you still have to pay your workers, suppliers and your landlord on time. This should not dampen your spirits, though. You can improve on your business' cash flow using invoice discounting or factoring.

What is invoice discounting?

With invoice discounting, you can steadily improve the cash flow of your business without having to badger your customers. Invoice discounting is a process that involves you, the business owner, selling your unpaid invoices to an invoice discounting company. The advantage of this transaction is that you end up getting immediate business financing in just a matter of days. This is to ensure that your business is not strapped for cash. However, you would have to pay a small discount to the invoice discounting company for their services. It should be noted though that as the business owner, you would have to take measures to ensure that your customers eventually pay for the owed invoices.

What is invoice factoring?

Another alternative you can consider when it comes to boosting the cash flow of your business is through invoice factoring. Factoring refers to the financial flexibility that is afforded to individuals who would like to raise cash flow based on the outstanding invoices they possess of their clients. Instead of mailing these invoices to the respective customers and then waiting for over thirty days to have them paid, you have the opportunity to change the invoices to liquid money.

With factoring, one would have to sell the rights of the invoices to the financial company that is offering the business those services. The factoring company will then pay the business owner the amount of the invoices in two parts. The first payment is known as an advance and the second payment is known as the rebate, which is the balance of the invoice. Unlike invoice discounting, factoring companies will typically have their own credit management services to ensure that the unpaid invoices are followed up on.