invoice factoring VS invoice discounting?

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According to cash flow figures 2021, 78 percent of businesses must wait an additional 30 days beyond agreed payment terms before getting paid; this is a major cause for the rise in the popularity of invoice finance. Invoice factoring and invoice discounting are two methods of invoice financing that are sometimes confused with one another. Today, I’ll discuss the differences between the two and assist you in deciding which is ideal for you.

What is invoice factoring?


Invoice factoring enables a firm to sell its unpaid invoices or accounts receivable to a third-party factoring company. The factoring company buys the invoices for a percentage of their total value and then collects the debt from your client.

What is invoice discounting?


Invoice discounting is similar to invoice factoring in that the lender advances money against your outstanding bills, but instead of the lender collecting the debt, it is your job to collect.

How does invoice factoring and invoice discounting work?


Invoice factoring and invoice discounting are both easy to utilize. When you invoice your client, you sell the invoice to the factoring company, and you will receive a percentage of the invoice value as advanced from them. Once the invoice is settled by your client, the remaining balance is transferred to you minus any lender fees. The key difference between the two services is that with factoring, the lender will chase the debt to settle the invoice, whereas with invoice discounting, it is your responsibility to collect the debt.

Invoice factoring and invoice discounting Cost Difference?


Because the factoring provider is responsible for tracking and collecting the debt, invoice factoring may be more expensive than invoice discounting. The cost of financing is determined by the amount of the invoice, the frequency with which it is used, the industry in which you operate, the dependability of your clients, and the size of your firm.

Pros and Cons of Invoice Factoring


Some of the benefits of invoice factoring include the factoring firm tracking and collecting the debt, giving you more time to focus on your business. Additionally, the factoring provider may be able to negotiate better payment terms for you. Some downsides include paying higher costs, your customers being aware that you’re borrowing against their invoices, and they may not want to deal with a third party, which might harm your connection with your client.

Pros and Cons of Invoice Discounting


Some of the benefits of invoice discounting include higher advances than factoring, lower fees, and the ability to offer credit to your customers with greater flexibility and no impact on your relationship because there is no third-party involvement. The disadvantages, on the other hand, are a fixed charge percentage of your turnover and a monthly fee even if you stop using the service.

INVOICE FACTORING or INVOICE DISCOUNTING


When picking between invoice factoring and invoice discounting, the size of your organization is the deciding factor. Let’s have a look at both of these and see which one is ideal for you.

In general, invoice factoring is preferable for smaller firms with poor credit management and payment collection capabilities because the lender will take on the burden of chasing down debt and collecting payments, but this will result in higher costs.

In general, invoice discounting benefits bigger organizations with the capacity and resources for debt collection; hence, many invoices discounting providers need a minimum turnover of 100,000 pounds and a solid balance sheet. Because the service is secret, larger organizations choose invoice discounting.

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