Factoring and invoice discounting are a couple of options open to businesses which enable them to convert their unpaid invoices into funds. As a basic idea for both of these financial services, you would usually approach a company which offers these services, and they will review these invoices. If everything checks out, then they will give you up to 90% of the debt value in advance.
While both are often used in the same sentence, and ultimately enable businesses to achieve the same goal, there are some clear differences between factoring and invoice discounting. The main difference between the two is that invoice discounting gives you more control over credit control, with the responsibility of collecting the debt remaining with the business. A benefit of this is that your customers can be made unaware of you needing a financial service to rectify cash flow problems.
Factoring on the other hand leaves the debt collection up to the financial service provider. This of course means you don’t need to allocate quite as much resources into collecting debt, letting you focus on sorting out any cash flow problems you have.
Whilst there is only one significant difference between the two different financial services, the similarities between the two enable both to offer the same benefits to businesses:
Businesses can increase their cash pool without the risk of having to secure loans against some of the business’s other assets.
Factoring and invoice discounting can help free up funds if your company is experience cash flow problems.
Some businesses use factoring and invoice discounting to increase funds available to expand the business.
Has a relatively quick payout time.
As an indirect benefit. Companies that offer factoring and invoice discounting services can often give good advice on helping your business.
These two financial services are particularly popular in industries where slow payment and long turnover time isn’t uncommon. A lot of these companies will face problems with having too much money tied down in supplies and stock, restricting the ability to grow the business or allow for redundancies in revenue and turnover.
So now you may be asking which is more appropriate for your business’s requirements. As a general rule of thumb, factoring is usually more suitable for smaller businesses and invoice discounting more suitable for larger ones. The reason for this is that smaller businesses often don’t have the resources to allocate to collecting debts, whereas larger businesses do have this option.
So what do you need to be eligible? And what criteria’s do factors look at when considering your eligibility? As with anything, different companies will have different requirements. Generally factoring is restricted to companies which have an annual turnover of over £200,000, although there are some who will consider smaller companies producing as little as £50,000 turnover. The nature of the debt and debtors will also play a part in your eligibility, and various risk assessments will need to be completed to ensure the debt will be paid.