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..
Both factoring and invoice discounting are invoice-based financing strategies.
They look a lot alike, especially in the following ways:
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:
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.
However, if you’re expanding your business overseas, factoring can save you a lot of headaches. The factoring company will deal directly with foreign clients.
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.
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.
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:
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.
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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