What-is-the-Difference-between-Invoice-Factoring-and-Discounting

While the concepts of factoring and invoice discounting are similar, their practical workings differ. The primary distinction between the two invoice finance types is in the control of the sales ledger. 

Before delving into these differences, let’s provide a brief explanation of how invoice finance operates in general terms.

 

What is invoice discounting and factoring?

Factoring and discounting are both types of invoice finance where a lender provides cash based on the outstanding sales ledger. These options allow businesses to secure consistent working capital throughout the month and are considered low-risk for both parties compared to traditional bank lending.

Invoice finance supports business development and growth, and the entry of more specialist lenders has made rates and fees competitive in recent years.

 

Do you want to retain control of your sales ledger?

This is a key question to ponder when contemplating invoice finance as a solution to cash flow challenges. For certain businesses, where customer communications significantly contribute to their overall ‘image,’ this consideration holds substantial importance.

In such cases, invoice discounting would be the preferable choice. You retain the responsibility of pursuing outstanding payments, and the fact that you’re securing funds against your customers’ unpaid debts remains confidential.

If customer communications are not a concern, factoring may better align with your business. All credit control procedures are delegated to the factoring company, freeing up your time to concentrate on other aspects of your business.

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So what are the other differences between factoring and invoice discounting?

I. Confidentiality

Due to your ongoing control over sales ledger processes with invoice discounting, it typically stays confidential, and your customers are unaware of the discounting arrangement. You pursue and accept payments as usual, and there is no mention of a third party on your discounted invoices.

In contrast, factoring lacks confidentiality – the factor contacts your customers for payment, and payments are directly remitted to the lender.

II. Terms of the agreement

Factoring typically serves as a longer-term financial solution. Lenders often mandate an extended notice period for exiting an agreement, possibly due to the greater commitment involved in managing the sales ledger on your behalf.

Conversely, discounting entails less disruption upon exit. Terminating an agreement is administratively simpler, but for both options, careful management of the transition period is crucial if the agreement is cancelled. 

III. Size of your company

Invoice discounting is commonly favoured by larger businesses equipped to manage their own credit control function. Factoring, on the other hand, can prove advantageous for smaller companies lacking similar resources, freeing up significant time for income-generating activities.

If you’re uncertain about whether factoring or invoice discounting is the more suitable finance option for your business, contact us at Vanguard Insolvency. With extensive experience across industries, we can connect you with a range of lenders, including small specialists and larger institutions. 

 

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.