What is the difference between invoice discounting and invoice factoring?

Understanding invoice finance: Discounting and Factoring Explained

Invoice discounting and invoice factoring are both types of a wider form of commercial borrowing known as invoice financing. Invoice finance works by allowing a company access to the money tied up in unpaid invoices. This is an extremely flexible form of borrowing which can help reduce the problems which come from late paying clients and provide an element of certainty to a company’s cash flow position.

Once an invoice is sent out to a customer, the invoice finance lender makes an agreed percentage of this amount available to the company immediately. Once a client pays the invoice, the lender will take their fee from this, with the remainder being made available to the company as usual.

As the amount of money available to a company through an invoice discounting or factoring agreement is based upon the value of invoices being issued, this form of funding is extremely scalable and can grow as the company grows.

When it comes to invoice finance, there are two main broad types to choose from: invoice discounting and invoice factoring. While they both work on the same basic premise, there are some key differences between the two which you need to be aware of.

• Invoice Discounting – The main difference between invoice discounting and invoice factoring comes down to how the company’s sales ledger is managed. With invoice discounting, you keep control of your sales ledger, meaning you remain responsible for chasing late payers and collecting payment from clients. The main benefit of this is that for your customers nothing will have changed and they will be unaware that you have entered into an invoice finance agreement. While this is good for maintaining confidentiality over your company’s finances, you must be confident in your collection processes and in your ability to chase up those clients who may be difficult payers.

• Invoice Factoring – Invoice factoring involves selling your sales ledger to the invoice factoring company, leaving them in control of recovering late or unpaid invoices. As your clients and customers will now have to pay their invoices owed to you via the invoice factoring company directly, they will be aware that you have entered into an invoice factoring agreement. While some company’s do not like invoice factoring for this reason, for others, being able to hand over credit control processes to a professional company can be seen as a time-saving advantage.

If you are considering a form of invoice finance for your limited company, taking advice from a business finance specialist can help ensure you secure the most appropriate form of funding at the very best price possible. At UKBF, we are experts in the commercial finance arena, and we make it our mission to scour the market to find the best deal for your company, allowing you to access funding which not only meets your immediate needs, but is also appropriate for your long-term objectives.