What is the difference between invoice financing, invoice discounting, and invoice factoring?
Throughout this article, you’ll have seen different terminology used to describe the various processes the umbrella term ‘invoice finance’ encompasses.
There are, quite frankly, too many of them to be unpacked here, so let’s focus on the two that matter most: invoice factoring and invoice discounting.
While both facilities are means of securing credit against your unpaid invoices, there are a couple of key differences between them, and we’ll give you a hint as to the biggest: credit control.
Let’s get technical for a second. When you engage an invoice factoring company for finance, they actually purchase your invoices outright.
Because the nature of this agreement means the lender effectively ‘owns’ your ledger, it allows them to deal with your clients directly. This means the lender is legally entitled to chase your clients up for payment, and – essentially – handle all your business’s credit control.
Invoice factoring may also be recourse or non-recourse. Non-recourse agreements (also known as a form of bad debt protection) mean that, in the event that your customer is unable to pay (for instance, they become insolvent or declare bankruptcy), you won’t be eligible for paying back the loan.
Again, this is only possible in a factoring agreement because the lender has ‘bought’ your invoices off you. In other words, the responsibility for its ultimate repayment lies with them – not you. In an invoice discounting agreement, however the finance provided against your invoice is only ever a loan – meaning it always needs to be paid back!
If you want to keep things confidential – that is, you don’t want your customers to know that you’re utilising third-party finance – you should opt for an invoice discounting facility.
Invoice discounting agreements allow you not only to retain the responsibility of chasing your unpaid invoices, but to keep a tighter leash on your business’ sales ledger, too. It’s also cheaper than factoring, as you’re not paying for the additional credit control services that those companies provide.
One more thing – with invoice discounting, your customer will continue to pay you directly. Conversely, if you’re using a factoring company, your client will pay directly to the lender, and you’ll receive the remainder of the invoice’s value (minus the fees, of course) from the invoice provider themselves.
And remember, invoice finance is an umbrella term. It encapsulates invoice factoring, invoice discounting, and several other related forms of finance, too.
Hope that makes sense! If not, feel free to drop a line to email@example.com to ask any further questions you might have about factoring, discounting, finance, and what the differences between them all are.