If you run a small business, you may have heard of factoring and invoice discounting. But what’s the difference between the two? And which one is right for your business? Here’s a breakdown of the two options, so you can decide which one is best for you.
What is Factoring?
Factoring is a type of financial transaction in which a company sells its accounts receivable to a third party at a discount. This allows the selling party to receive cash for products or services it has already delivered, but at a lower price than the full value of the invoice. Meanwhile, the factoring company then assumes responsibility for collecting payment from the customer.
Factoring can be beneficial for businesses that need quick access to cash or have difficulty collecting payments from customers. It can also help them improve their cash flow, since the funds from factoring are received more quickly than if the business waited for customers to pay their invoices.
What is Invoice Discounting?
On the other hand, invoice discounting is a type of short-term loan that allows businesses to unlock the cash tied up in their outstanding invoices. This financing option works by providing businesses with a percentage of the value of their invoice (minus a small fee) as soon as the invoice is issued. This basically gives businesses the flexibility to manage their cash flow and reduce their reliance on bank loans.
The main advantage of invoice discounting is that it is a flexible form of funding that can be used to cover a wide range of business expenses. However, invoice discounting can also be expensive, so it is important to compare the costs of different providers before agreeing to a deal.
Which Option Suits Your Business Better?
Both factoring and invoice discounting can be helpful in getting cash flow for your business, but there are some key differences between the two. Let’s take a closer look at each one to see which might be a better fit for you.
- Factoring is when a company sells its accounts receivable (aka invoices) to a third party for immediate cash. Invoice discounting is when a company borrows money from a lender by using its outstanding invoices as collateral. In short, factoring is a transaction, whereas invoice discounting is a loan.
- Factoring typically has lower interest rates than invoice discounting, though it comes with additional fees.
- Factoring doesn’t obligate you to pay for the invoice in case the customer reneges on the payment, while invoice discounting will require you to do so since it is a loan.
- Factoring companies will perform credit checks on your customers before buying your outstanding invoices. Invoice discounting companies won’t.
Wrapping Up
If you’re looking for a quick and easy way to get the cash you need to grow your business, you should definitely consider factoring and invoice discounting. These funding options can help businesses of all sizes access the capital they need to expand and succeed. Contact us today to learn more about how we can help you get the funding you need to take your business to the next level.