Two Types of Invoice Finance

Businesses which are not used to invoice finance can often become confused as to the differences between the deals available to them. The similarities between the two main types of invoice finance are significantly greater than the differences, however, and are not difficult to understand.

Factoring

Invoice finance agencies which offer factoring as an option are, essentially, looking to provide a comprehensive sales ledger management operation. As with all forms of invoice finance, the basic principle will be that your company hands over the rights to a portion of its invoice book, in return for an immediate cash payment. As you might expect, that cash payment will not be worth as much as the final rights to the invoice book, but has the significant advantage of being available straight away. The distinctive feature of factoring is that the company receiving the cash payment gives away all rights of credit control over the portion of the invoice book involved in the deal. In other words, the invoice finance agency will chase the payments and collect the money directly from the customers, with no further involvement from the recipient company.

Invoice Discounting

In contrast, invoice discounting means that the recipient company maintains some control over the credit control portion of its financial operations. Whilst it pledges to pay all of the money collected from the invoices in question to the invoice finance agency, it is still in control of the way in which customers are approached, and the collection of payment from them. The only obligation upon the recipient company is timely payment of the sum agreed. In general, this is usually an option chosen by larger companies, and many invoice finance agencies will not make it available to new customers or start-up businesses.

Making Your Choice

If you are given the choice between the two types of invoice finance, you will need to assess the specific needs of your business, as well as your relationship with your customer base. Factoring can be an excellent option for smaller businesses, particularly those who do not have dedicated finance staff, or who find credit control operations onerous. On the other hand, outsourcing such a vital function can reduce your control over the experience of customers. Invoice finance agencies may be experts in credit control, but their primary concern is not the experience of your customers. They are concerned, instead, with getting the maximum return from the invoices over which they have assumed control. This can mean that late-paying customers can find themselves aggressively chased for payment, even in situations where your own staff might have taken a decision to show moderation or understanding. Whilst you can rest assured that the invoices will be collected, you may find your repeat business tailing off if the finance agency operates in a heavy handed manner. For this reason, it is vital that you investigate the agency you are dealing with before entering into an agreement. Make sure you are happy with their methods before you sign up.

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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