In this article, we will explore the main differences between invoice discounting and invoice factoring. Read on to learn more.
Invoice discounting is a way for businesses to get cash quickly by borrowing against their unpaid invoices. It’s like an advance on money you're already owed, helping with cash flow while you wait for clients to pay.
Example: A small business sells 100 units of their product, X20 Widgets, to a retailer for $5,000 but won't receive payment until later. To improve cash flow, the business uses invoice discounting to borrow $4,500 against the invoice, covering immediate expenses while waiting for full payment.
Here are some of the distinct qualities of invoice discounting:
Invoice discounting provides quick access to funds tied up in unpaid invoices, helping businesses cover expenses or seize opportunities without waiting for customer payments.
Clients are unaware of the arrangement since the business still handles invoice collection, preserving trust and maintaining normal operations.
The amount you can borrow grows with your sales since it’s tied to the value of your invoices, making it a scalable solution for cash flow.
Unlike traditional loans, invoice discounting doesn’t require additional assets as security, relying only on your outstanding invoices.
By improving cash flow, it enables businesses to meet operational needs, invest in growth, and handle unexpected expenses effectively.
Invoice factoring is when a business sells its unpaid invoices to a third party, called a factor, for immediate cash. The factor then collects the payments directly from the customers, taking a fee for the service.
Example: A company sells $10,000 worth of ProTech Laptops to a retailer but needs cash sooner than the payment terms allow. They sell the invoice to a factoring company for $9,500, and the factor collects the $10,000 directly from the retailer.
Here are some of the distinct qualities of invoice factoring:
Invoice factoring provides businesses with instant cash by converting unpaid invoices into funds, reducing financial strain and enabling timely operations.
The factoring company takes over the responsibility of collecting payments from customers, saving time and resources for the business.
Since customers pay directly to the factoring company, they are aware of the arrangement, which can impact how the business relationship is perceived.
The factor charges a fee or takes a percentage of the invoice value, which reduces the overall amount the business receives but ensures quicker cash access.
Approval for factoring depends on the creditworthiness of the business’s customers, not the business itself, making it a viable option for businesses with strong clients.
Invoice discounting and factoring may seem similar but they serve different purposes. We will explore these differences below.
We hope that you now have a better understanding of the key differences between invoice discounting and invoice factoring. If you enjoyed this article, you might also like our article on invoice data entry service or our article on OCR classification.