When a company runs short on cash flow, they often to turn to business loans to fund their daily operations. But for business owners who aren’t too keen on taking on additional debt, invoice financing may be their best option. Invoice factoring and invoice discounting are two of the most common forms of invoice financing. Unfortunately, many business owners cannot distinguish the difference between the two.
What is Invoice Factoring?
Invoice factoring is a financing option where a business ‘sells’ their pending invoices to third-party companies at a discount. The terms and conditions involving invoice factoring usually vary, but a majority of factoring companies provide between 60% to 80% of the total value of an invoice.
Invoice factoring, removes a lot of the worry surrounding the managing of your invoices. Factoring companies take on the responsibility of overseeing credit control, processing invoice payments, as well as collecting payments from your customers.
What is Invoice Discounting?
Much like factoring, invoice discounting is a short-term financing option where business owners borrow money against pending invoices. Entrepreneurs often use invoice discounting to help improve working capital and cash flow.
Invoice discounting allows you to retain control over your sales ledger, payment collections, and invoice processing. Unlike invoice factoring, your customers will remain unaware of the transactions between you and the lender.
What are the Main Differences Between Invoice Factoring and Discounting?
Both invoice factoring and discounting involve borrowing against pending invoices. However, the main difference between the two can be narrowed down to the one who controls the sales ledger and collects the payment from customers. To be more specific, here is what differentiates one from the other.
Business owners primarily consider flexibility when choosing the best financing option for their businesses. With invoice discounting, potential lenders often request that you finance all your current pending invoices. While a good many companies agree with this, there are others who prefer only to finance specific invoices. If you decide you would rather not finance all your pending invoices, the ideal choice for you may be invoice factoring.
Invoice discounting is also known as ‘confidential invoice discounting’. As previously mentioned, your customers wouldn’t have to know you’re using the services of an invoice financing company. With invoice discounting, it’s business as usual. On the contrary, factoring companies deal directly with your customers. This means your clients will know you’re using invoice financing.
Since a potential lender loans funds without the assurance of getting repaid, risk is a crucial factor in every type of financing. Without credit control, lenders take on more risk by advancing money against your invoices. For this reason, discounting is often used by larger businesses with higher turnover and creditworthy clients. Invoice factoring, on the other hand, is commonly used by smaller businesses.
If you would like specific details about how invoice discounting and factoring can help you and your business, contact SMB Compass’ lending experts today for a free, no-obligation chat.
Our specialists who have assisted over a thousand small business owners secure the financing they need, are available to take your call and answer your questions.