What is the Difference Between Factoring and Invoice Discounting?
🆚 Go to Comparative Table 🆚Factoring and invoice discounting are both methods of gaining an advance against unpaid invoices, but they have different structures and implications for businesses. Here are the key differences between the two:
- Financing Structure: Invoice discounting is a loan or line of credit backed by your outstanding receivables, while invoice factoring involves selling your outstanding invoices to a factoring company at a discount.
- Collections Process: In invoice discounting, the business is responsible for collecting the invoices, while in invoice factoring, the factoring company takes over the responsibility of collecting the invoices.
- Customer Awareness: In invoice factoring, the customer is aware that the invoice is being factored, but in invoice discounting, the process is confidential, and customers are usually unaware that the business is using a financial service.
- Customer Payment: In invoice factoring, the customer pays the factoring company directly, while in invoice discounting, the customer pays the company as normal.
- Fee Structure: Invoice discounting typically costs 0.75% to 2.5% of the invoices' total value, while invoice factoring requires a similar fee (the service fee) plus an administration fee (between 1.5% to 2.5%).
- Amount of Invoice Made Available: Invoice discounting often involves a basic check of your existing sales ledger to determine the amount made available, while invoice factoring generally makes between 75% to 85% of the value of your invoices available.
- Customer Credit Vetting: Invoice discounting often requires minimal credit control, while invoice factoring may involve more thorough credit vetting of your customers.
In summary, invoice factoring is more like selling your invoices to a third party, which then handles the collections process, while invoice discounting is a loan secured against your outstanding invoices, with the business still responsible for collecting the invoices. The choice between the two depends on the specific needs and circumstances of your business.
On this pageWhat is the Difference Between Factoring and Invoice Discounting? Comparative Table: Factoring vs Invoice Discounting
Comparative Table: Factoring vs Invoice Discounting
Here is a table comparing the differences between factoring and invoice discounting:
| Factoring | Invoice Discounting |
|---|---|
| The factoring company purchases the unpaid invoices outright from the business. | The business borrows against its outstanding invoices, and the lender takes a charge over the invoices. |
| The factoring company is responsible for managing the sales ledger and collecting debts from customers. | The business remains responsible for managing its sales ledger and collecting debts from customers. |
| The factoring company advances a portion of the invoice amount (usually around 80-90%) to the business, and the remaining amount is paid after the customer pays the invoice minus the factoring company's fee. | The business receives a loan or line of credit based on its outstanding receivables. |
| Factoring may be recourse or non-recourse, meaning that the business may or may not be held responsible for any unpaid invoices. | Invoice discounting is typically a non-recourse product, meaning the business is not held responsible for any unpaid invoices. |
Read more:
- Factoring vs Bill Discounting
- Factoring vs Accounts Receivable Financing
- Trade Discount vs Cash Discount
- Invoice vs Bill
- Invoice vs Tax Invoice
- Receipt vs Invoice
- Discounted vs Undiscounted Cash Flows
- Rebate vs Discount
- Proforma Invoice vs Commercial Invoice
- Discount Allowed vs Discount Received
- Trade Discount vs Settlement Discount
- Invoice vs Statement
- Accounts Payable vs Accounts Receivable
- Invoice vs Purchase Order
- Discount Rate vs Interest Rate
- Factoring vs Forfeiting
- MSRP vs Invoice
- Factor Cost vs Market Price
- Payback Period vs Discounted Payback Period