Invoice discounting and factoring are similar products, however there are some key differences. The main one being that invoice discounting is usually provided confidentially, i.e. your customers will be unaware how you have chosen to fund your business.
Unlike factoring it is only suitable for a business with established credit management procedures, because the discounter does not interfere with the chasing of your sales ledger, and is therefore more appropriate for larger businesses (£250k+) with stronger balance sheets.
Invoice discounting provides your business with cash by allowing you to raise finance from the unpaid invoices owed to you. Invoice discounting can also be offered as part of an asset based lending facility where multiple assets such as stock, debtors, machinery, and property are used to provide flexible secured lending.
For many businesses, their outstanding sales invoices are their largest asset, with up to one quarter of a company's overall yearly turnover remaining unpaid at any one time. This "locked up" cash can greatly impact the growth potential of a business and may sometimes force a business into insolvency.
the mechanics of invoice discounting
Step 1: You deliver goods or provide services to your customer
Step 2: You invoice your customer and notify the invoice discounter.
Step 3: The discounter advances you the pre-agreed % value of the invoice usually the next day
Step 4: Upon invoice payment, the discounter takes their fees and then pays you the balance of the invoice value
back to top Charges
Invoice discounting charges are made up as follows:
- service fee: The discounter normally charges a service fee expressed as a percentage of the total volume of invoices discounted usually ranging from 0.1-1% depending on the volume and nature of your business.
- interest charge: An interest charge is applied to the monies lent by the discounter to you and compares favourably with overdraft rates.
An additional service which may be offered to you is bad debt protection. Bad debt protection allows you to protect yourself against the outcome of one or more of your customers failing to pay you for the services or goods you have delivered. This is generally charged at between 0.4- 0.7% of the value of the debt.
Key differences between factoring and invoice discounting:
| factoring |
invoice discounting |
| For companies with £50k+ turnover |
For companies with £250k+ turnover |
| Invoice collection provided |
Invoice collection not provided |
| Service usually disclosed to customers |
Service not usually disclosed |
| Full ledger management provided |
No ledger management provided |
| Credit checking provided |
Credit checks not normally provided |
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