5 Questions to Decide Between Invoice Factoring and Discounting

Invoice factoring and invoice discounting are the choices you have when you elect to utilise the services of an invoice financing provider. They are often considered to be vastly different but in actual fact, the similarities are more striking.

Invoice factoring involves releasing complete control of your invoices to the provider. The company receives a minimum of 80% of the invoice’s worth up front while the provider is in charge of collecting the debt. The company pays the provider a pre-determined rate of interest and other fees on top. Invoice discounting also involves a company selling invoices to a provider. In this instance however, the company remains in charge of collecting the debt. With this in mind, you need to decide which option is best for your business. Ask yourself the following questions before proceeding with this method of funding.

1 – Are Your Collection Costs Too High?

It is very easy for a company to completely lose control when it comes to collecting invoice money owed. Perhaps your business does not have staff that is skilled enough to efficiently perform the task. Organisations that believe too much time and money is being wasted recovering outstanding debts may wish to consider the services of an invoice factoring company. If your business performs the debt collecting function to a high level, you should probably choose invoice discounting instead.

2 – What Will Your Clients Think?

With invoice factoring, the provider will be performing the task of collecting debts. This puts them in direct contact with your client list. Providers will not do business with clients who they consider to be a credit risk. If you believe that certain clients will be upset by having to deal with a third party, you should use the confidentiality afforded to you by invoice discounting. If you believe that the finance company will treat your clients with respect and it will not upset your customers, by all means choose invoice factoring.

3 – What Information Do You Need?

Do you have a method of collecting credit data on your clients? The credit terms agreed with customers usually depends on their financial situation. If you think that a finance company will gather the necessary data, choose invoice factoring. On the other hand, you may have efficient data collection techniques which you don’t want altered. In that case, choose invoice discounting.

4 – How is Your Financial Situation?

With both factoring and discounting, you are paying fees in order to receive a large sum of cash up front. If you collected debts from invoices in the traditional manner you would certainly recover more cash overall. However, you will experience delays when it comes to receiving the money. Invoice discounting is less expensive than factoring because it is a lower level service.

5 – How Diverse Is Your Invoice Portfolio?

Invoice financing providers tend to steer clear of companies that are heavily reliant on one or two clients. Invoice discounting seems to be the better choice for businesses that have a large and diverse portfolio of clients. One of the main reasons for this is because larger companies tend to have an existing method of collecting invoice debts and changing it could be a lengthy and counter-productive step. To be accepted by either an invoice discount or invoice factoring provider, your portfolio needs to be diverse.

Carefully view the above questions and decide which option is best for your compan

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.


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