How do factoring and invoice discounting differ?
Mon, 04 Jun 2007
In both these forms of finance the lender will provide you with an advance against the value of your debtors. The key differences are that with factoring, in addition to advancing you money, the lender also takes over management of your sales ledger and credit control and provides you with the service of actively chasing your customers’ payments on your behalf.
This can in itself be an advantage if your credit control has been poor but it means that factoring is a very ‘public’ means of funding unless you opt for new ‘confidential factoring’ services now being offered by some lenders.
With invoice discounting you continue to run your own sales ledger and collect in your own debtors, which means it is possible to maintain confidentiality. As a factor is dealing directly with your customers, any issues which will mean a movement in the reserves applied to your account will be made on a live basis; while with invoice discounting this tends to be a monthly process.
Some of the key differences between factoring and invoice discounting are summarised below:
|
|
Factoring |
Invoice discounting |
|
Visibility |
Normally public |
Normally confidential |
|
Debt collection |
Part of the package |
You do your own |
|
Adjustments to availability |
Live |
Monthly on reconciliation |
|
Application |
Most businesses with factorable debt |
Businesses with turnovers of over £1m and a positive balance sheet |
