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invoice factoring VS invoice discounting


invoice factoring VS invoice discounting

according to the cash flow statistics uk 2020, 78 of uk smes have to wait an extra 30 days beyond agreed payment terms before being paid this is a key reason for the increase of popularity of invoice finance the two types of invoice finance are invoice factoring and invoice discounting terms that are often confused with one another. Today i will explain the difference between the two and help you decide which one is best for you.


What is invoice factoring?

invoice factoring allows a business to sell its unpaid invoices or accounts receivable to a third-party factoring company the factoring company buys the invoices for a percentage of their total value and then takes the responsibility of collecting the debt from your customer.


What is invoice discounting?

invoice discounting is similar to invoice factoring the lender will advance the money on your unpaid invoices however instead of lender chasing the debt it is your responsibility to collect.


How do they work?

both invoice factoring and invoice discounting are simple to use you invoice your client you then sell the invoice to the factoring company you will receive a percentage of the invoice value as advanced from them once the invoice is settled by your client the remaining balance is transferred to you minus any lender fees the key difference between the two services is with factoring the lender will take the responsibility of chasing the debt to settle the invoice with invoice discounting it is your responsibility to collect the debt from your customer.


Is there a Difference in Cost?

invoice factoring may cost more than invoice discounting since the factoring company is responsible for chasing and collecting the debt cost of finance is dependent on value of the invoice, frequency of use sector you operate in, reliability of your clients and size of your business.


Pros and Cons of Invoice Factoring

some of the pros of invoice factoring include the factoring company taking the responsibility of chasing and collecting the debt this will give you more time to focus on your business also the factoring provider may also be able to negotiate better payment terms for you some of the disadvantages on the other hand include you will be paying larger fees your customers will be aware that you're borrowing against their invoices and they may not want to deal with a third party which can affect your relationship with your customer.


Pros and Cons of Invoice Discounting

some of the pros of invoice discounting include you can receive higher advanced than factoring smaller fees service is confidential which means your customers don't know you're using the service you can offer credit to your customers with greater flexibility and no impact on your relationship since there's no third party involvement disadvantages on the other hand are a fixed charge percentage of your turnover you pay a monthly fee even if you stop using the service you will incur fees while chasing the debt and the time spent while chasing the debt.


INVOICE FACTORING vs INVOICE DISCOUNTING

the size of your business is the deciding factor when choosing between invoice factoring and invoice discounting let's have a look at both of these and which one may be best for you.


invoice factoring is generally better for smaller businesses with limited credit control and payment collection facility this is because the lender will take the responsibility to chase the debt and collect payments however this will mean larger fees.


invoice discounting is generally better for larger businesses with the ability and resources for debt collection therefore many invoice discounting providers require the business to have a minimum turnover of 100 000 pounds and a positive balance sheet invoice discounting is also preferred choice of larger businesses since the service is confidential.

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