Updated: 26th January 2020
Both invoice discounting and invoice factoring are cash flow solutions designed to free up funds for companies that are solvent and operationally sound but which could benefit from a short term cash injection.
Invoice factoring is a means through which a business can effectively sell its ownership of specified invoices and its rights to the money due under its terms. The benefits of factoring are that a company can access cash much more quickly than they otherwise would if they were obliged to wait until a debtor settled the amounts due.
Discounting has essentially the same benefits as factoring and involves most of the same features but it is a confidential process. Thus, the clients being issued the relevant invoices are not informed that your company is outsourcing payment collection. For some companies this confidentiality is seen as an important gain and therefore they will prefer discounting to factoring.
Unlike with invoice factoring, the invoice discounting process relies on the company that issued the invoice pursuing the recipient for payment. Under these circumstances, there is no need for the recipient to be made aware that their invoice has been sold. For some companies this scenario will be seen as an advantage but for others the simplicity of invoice factoring holds the greater appeal.
With factoring, an invoice can be sold and the responsibility for chasing up payment in relation to that invoice is then passed to a third party. For smaller businesses in particular this can be a valuable benefit of factoring because they can simply sell their invoice or invoices for a pre-agreed price and then move on to focus on other aspects of their operations that require attention.
There is a balance to be struck for any company considering using invoice factoring or discounting between the value of selling invoices and waiting for however long it takes for those invoices to be settled under normal circumstances.
Generally speaking, a company utilising either form of fundraising solution will be able to secure between 80% and 90% of the amount of money originally due to be paid by their clients. Discounting will typically involve slightly lower charges and fees than factoring.
If you are involved in running a business that could benefit from the potential to generate a cash injection through invoice factoring or discounting then there are a number of different options available. It is always best to enter an arrangement that works best for your precise situation and we at Begbies Traynor can help you determine exactly what that should be.