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Invoice factoring and invoice discounting are two viable options for businesses seeking alternative funding in these uncertain times. But what is the difference between the two? And which one is better for your business?
First, Some Background
The specter of Brexit lingers, and major banks warn of a potential knock-on effect for business borrowing in the UK. For example, the Royal Bank of Scotland is the latest bank to suggest that Brexit uncertainty could continue to delay and hinder business borrowing decisions, as the brand announced a fall in profits for the first three months of 2019.
With this in mind, it’s little wonder that entrepreneurs are seeking out alternative sources of funding in the modern age. That’s because, regardless of the times, they look to drive their ventures forward as quickly and as efficiently as possible.
Invoice factoring and invoice discounting are two viable options. However, they share a number of similarities that make it hard for entrepreneurs to choose between the two. But there are also several differences. Moreover, these differences can help to inform your decision, regardless of your unique circumstances.
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Invoice Factoring vs. Invoice Discounting: The Key Differences
Benefits of Invoice Factoring
Let’s start with invoice factoring. This is a transaction through which a business sells its accounts receivable to a third party at a slight discount.
This helps firms to better manage 60- or 90-day invoice terms. Further, this enables them to optimize cash flows and repay their short-term debts once clients have settled outstanding invoices.
Benefits of Invoice Discounting
Invoice discounting shares many of the same characteristics. However, with invoice discounting, the lender holds unpaid accounts as collateral for the advance they extend to the business.
Business owners can find lenders for invoice discounting on resources such as Touch Financial. Naturally, owners’ decisions about invoice discounting will depend on their circumstances. Typically, however, the advances range up to 90% or even 100% of their invoice values.
With invoice factoring, on the other hand, business owners fully outsource the credit control function. This means that the factoring provider takes the role of managing the sales ledger and chasing payments.
Conversely, invoice discounting enables clients to retain control of their sales ledger. Additionally, they gain added security and confidentiality over their own internal data processing.
Which Option Is Best for You?
There are numerous similarities between invoice factoring and invoice discounting. But it’s a handful of subtle differences that should ultimately help entrepreneurs to make an informed decision.
Basically, invoice discounting enables applicants to retain greater control of their sales ledger. For this reason, this method of borrowing is generally preferred by larger firms.
The reason for this is simple. Larger firms typically boast a more diverse array of blue-chip clients. They can therefore benefit by leveraging the high value of their accounts receivable to secure a considerable loan.
In contrast, smaller firms tend to favor invoice factoring. That’s because this is the best way for them to realize the full value of their accounts receivable.
Additionally, they likely have a smaller and less established client base. These clients, moreover, are likely comfortable with a company’s decision to outsource some of their credit control functionality.
Only You Can Decide Whether Invoice Factoring or Invoice Discounting Is Better for Your Business
Only you, as the owner of your business, are in a position to decide whether invoice factoring or invoice discounting is better for your company. Hopefully, this post can lead you to make a wise decision.