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What’s the difference between factoring and invoice discounting? And which is right for your business? As companies explore the growing world of alternative financing and fintech, these are common questions.
Factoring (what is factoring) and invoice discounting (what is invoice discounting) both involve a company advancing you a percentage of an outstanding invoice. They’re both examples of ways to jumpstart your accounts receivable and quickly reinvest those funds.
But some key differences exist. You should dig into these differences before using choosing between factoring and invoice discounting. Let’s explore these methods in detail..
The Similarities: Time Frame, General Process
Both factoring and invoice discounting are invoice-based financing strategies.
They look a lot alike, especially in the following ways:
- Amount of Money and Time: Both release somewhere between 70% and 90% of the value of an outstanding invoice within 24–48 hours. This is in contrast to the 30 to 60 days it takes for customers to pay invoices.
- Financial Considerations: Neither requires provable assets or company credit checks. They’re only concerned with the reliability and credit rating of the company that owes the invoice.
- Reward Good Customer Relationships: Users receive better rates when their customers pay invoices on time. So, both tools reward taking time to develop relationships.
The Main Difference: Who's Collecting Payment?
The primary process is the same with factoring and invoice-discounting. However, there’s one important difference — who collects payment from your customers. Let’s explore the pros and cons of each method:
Factoring Payment and Invoice Discounting
A factoring company takes over collecting the invoice entirely. You don’t have to wait for the company to pay. The factoring company will wait for the invoice payment. This has advantages and disadvantages. On the one hand, the companies that owe you invoices may think if you are factoring for cash flow, this means you’re having cash flow problems. Whether this is true or not, you usually want to avoid creating this impression.
This saves you a lot of time, money, and hassle. If you’re looking to develop long-term relationships, factoring might not make sense. However if you are seeking something more short-term, it’s a great option.
Invoice Discounting Payment Collection
With invoice financing, you‘re still the main actor. Your company must issue the invoice and pay the invoice financing company. You’ll need to put in the time and resources to contact your clients and collect payment yourself (which might increase your costs). Still, you get to keep total control of your customer relationships.
With invoice financing, whoever owes the invoice will likely have no idea that you’ve gotten an advance on it. You avoid creating a (possibly) wrong impression, so this is your best option if your primary concern is ensuring discretion.
How Should You Make Your Decision?
Both factoring and invoice financing work better for companies in industries that deal with large bulk sales. Getting an advance on thousands of smaller payments is inefficient because of the many fees, which add up, and the time it requires, whereas getting an advance on a single large payment helps you get more money more easily.
For this reason, the most common industries which use one of these financing techniques are manufacturers, wholesalers, and construction.
If your business fits the right category, and so do your clients, the next set of questions to ask yourself are:
- Is your business experiencing cash flow problems?
- Would your business benefit a lot from being able to reinvest capital one to two months ahead of schedule? In other words, are you aiming for faster growth and willing to use factoring or invoice financing to reinvest immediately?
- Does your business need greater flexibility? Sometimes a new business opportunity may appear when you’re not ready to invest the money required to take advantage of it. Factoring and invoice financing can help you have more flexibility.
If you think your business could benefit from using factoring or invoice discounting, the last piece of the puzzle is finding the right financing company.
The Right Factoring or Invoice Discounting Partner?
It’s essential to find a financing partner you can trust to help you on accounts receivable matters. Make sure you look for case studies, recommendations, and other signs that you’re working with a verified, secure company. If you’re looking for invoice discounting in Canada or the US, check out FundThrough’s innovative approach. We hope it will be the right fit for your business!
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