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Factoring or Discounting?

What is the difference between invoice factoring and invoice discounting?

The primary difference between invoice factoring and invoice discounting is the handling of the sales ledger, credit control and debt collection. Factoring is the more comprehensive solution, all receivables are handled by the broker. Whereas discounting the ledger management, credit control and risk are yours to deal with. The cost of factoring is higher than discounting but the product is more comprehensive, it lets you remove all stress and time from debtor collections.

Which one is right for your business?

This very much depends on the needs of your business, size of your sales ledger and how much effort you want to put into collection and debt management.

If you have a member of staff or someone that can be trained in collecting payments and chasing debt then it may be feasible to go for the discounting option. However you must remember that any invoices not paid by the deadline will lead to the lender recovering the funds from your business. Therefore it is imperative for cash flow that this is managed correctly.

If using invoice factoring then once the invoice has been submited to the lender, the collection and debt management is all done by them. You can choose to have a discrete service so the customer is not aware of the facility.

What is the cost difference between invoice factoring and invoice discounting?

This also depends on a number of factors such as industry, number of clients, size of invoice and diversity of clients. 

Typically the cost implication for invoice factoring is anywhere between 0.5-2% above the cost of invoice discounting. For a smaller business the added value of the factoring services provide a very good option.

However, if you have a business with a turnover of above £2 million it may be feasible to employ an in house credit controller depending on the circumstances and growth of the business because at 1% it would cost £20,000 per annum and a junior credit controller can be roughly the same cost but become cheaper as the company grows.