Factoring and invoice discounting are both ways that a business can release money tied up in their accounts receivable i.e. outstanding invoices, effectively selling the invoice to a factoring company in order to have money available more quickly.
Contrary to popular belief the use of factoring and invoice discounting is not always a sign that the business is in trouble, although it is an effective tool in improving cash flow for a struggling business that may otherwise be in trouble due to late paying customers. The main reasons that these options might be considered are outlined below.

Reasons factoring and invoice discounting may be considered

There could be many reasons that a business may require money from an invoice sooner than the debtor has agreed to pay; but the main reasons are:

  • Business start-up finance – This is a flexible way to get finance that will enable the business to get off the ground.
  • Business growth – The ability to put money instantly back into the business enabling it to grow and progress.
  • Cash flow problems – Cutting out the wait between invoicing and receiving payment which enables the business to continue forward.

Differences

The main difference between factoring and invoice discounting is the control of the sales ledger and responsibility for collecting outstanding debts. With factoring, the factoring company takes over the sales ledger; invoice chasing and credit control; and customers will settle debts directly with them. With invoice discounting the business remains responsible for issuing and collecting on invoices.

Factoring

A factoring company would create an account which the business could draw from against its invoices, when an invoice is issued 80-90% of that invoice will be made available for the business to use, you are not obliged to take every amount available. When the customer settles the invoice the remaining 10-20% will be credited to the account less any fees and interest. Since customers will deal directly with the factoring company when settling invoices it is difficult to hide their use, however some do offer a ‘transparency’ where it will appear that all correspondence comes directly from your business. However, debtors are used to dealing with factoring companies and as such this rarely causes problems.

Invoice Discounting

Invoice discounting is very similar except that since the business is still responsible for debt collection it is the business that will pay the factoring company once the invoice is paid. This means that customers would be unlikely to be aware of the third party.

Fees

Fees for these services are usually dependant on the type of agreement you take and other elements such as annual turnover, the amount the business is borrowing against the invoice and the length of time it takes your customer or the business to pay. There are many different types of agreements and many difference companies that provide them. If you are interested, it would be best to do some research, gain some independent advice and get more than one quote.
If you have any questions or need ny advice, please feel free to contact us.