Factoring vs Invoice DiscountingAnne MacRae2016-06-13T03:49:20+00:00
Invoice Factoring vs. Discounting
Is There A Difference?
In short, some accounts receivable finance companies will differentiate these products. However, we combine the benefits of both to create a superior product. Contact us to learn more, or read on.
Many people ask if there is a difference between invoice factoring and invoice discounting. Both are considered to be accounts receivable financing products. Invoice discounting is an alternative business funding products which enables companies to free up working capital (cash) that is tied up in unpaid bill. Both will involve a third party, like Express Business Funding, to advance money against the outstanding balances owed by customers (similar to a cash advance for a business). This page providing a comparison of both products, comparing the various pros and cons and detailing who the products are best suited for. The good news for you is, our product combines the individual benefits of both these services. Now with Express Business Funding you don’t have to choose between pros, we got rid of the cons.
How each product works?
Considering these are both A/R business financing solutions, both products are very similar. They do however have slight differences that affect the relationship between the vendor, their client (the business providing the goods/services), and the client’s respective customers (the company which the bill is made out to). The differences of invoice factoring vs. invoice discounting can be summarized in the following two points:
When Invoice Factoring in Canada, the third party company takes full control of the bills once they have been created. They will send the bills to the customers with a Notice of Assignment (directing the customer to pay the vendor directly), chase down slow paying customers for settlement of bills, and manage the credit control of the business; approving the bills that are valid for factoring. They are also responsible for processing the payment of bills, meaning that the customers are fully aware of the business contract the client has with the financier.
With Canadian Invoice Discounting, customers are usually unaware of the relationship between the client and the vendor. The client maintains responsibility for the issuing of bills to the customer, all collection responsibilities, and approval of the credit of the customers. Leaving more control for the client seeking business funds and providing additional. Both financing solutions have their own benefits and the decision is dependent on the individual company, as discussed in the next section.
Compare The Benefits of Each
Although there are key differences, the overall benefits are basically the same:
Releasing of 70% to 90% of the value of outstanding bills within 24 hours
Funding can be secured without requiring other assets
Cash is freed up to either lessen cash flow problems or grow the business
Supplier bill paid promptly will increase the power to negotiate discounts
Funding levels increase with turnover without ongoing time-consuming reviews
Want to know more?
The additional benefit of Invoice Factoring is that it comes with a complete outsourcing of customer credit review, collection services, and payment posting. For new companies that may feel short staffed, this enables them to focus time and resources on other areas of their business. On the other hand, the advantage of invoice Discounting is that responsibility for issuing of bill for the goods / services, customer credit approval, and ongoing debt collection remains with the client and the customers’ are often not even aware of any cash flow issues the client may be having.
What’s the best solution?
Choosing the best solution may be more difficult than it sounds. The good news is that you really don’t need to choose. Express Business Funding’s products combines the benefits of both products into a superior alternative business funding product. This leaves our clients with greater flexibility and ability to focus on what matters, that is growing their business.
However, to give a more generic answer and compare both these accounts receivable financing products generally, it really depends on you, the nature of your business and your particular needs. Business size and the management resources will be key considerations when choosing which of these two solutions is the most appropriate business financing solution for your business.
Typically a factor works better when funding smaller businesses. A main reason for this is the outsourcing of the collection service and increased credit control that factoring provides. For larger business, where either greater resources exist, or you want your company to maintain a certain level of control of the timing of the issuing of the bill and the debt collection process, Invoice Discounting is often the better option.
Combine Invoice Factoring & Discounting
As a leading business finance company in Ontario, we leave you in control, you can issue bills and manage debt collection. However, if you would like us to take on some of these responsibilities, we will be happy to do so. And we can offer these through either a full notification program where customers remit payment to Express Business Funding directly, or through a special non-direct notification program where payments are remitted electronically to a designated bank account in your name. No other Invoice Factoring company in Canada can provide you with the control and flexibility that is offered through Express Business Funding!
With invoice discounting, the bill financier won’t manage your sales ledger or collect debts on your behalf. Instead, they lend you money against valid bills that are outstanding – this is usually an agreed percentage of a bills face value . As your customers pay the amount due this reduces the amount owed by your company. You are able to borrow more money on bills from new sales up to the percentage you originally agreed. You’ll still be responsible for collecting debts if you use invoice discounting, but it can be arranged confidentially so your customers won’t find out.
For additional details see: UK Gov Finance Website.