Invoice Factoring VS Invoice Discounting

What is the difference between invoice factoring and invoice discounting?

Having a healthy cashflow is a ‘must-have’ when it comes to successfully running any business, but it isn’t always that straightforward. Capital can often get tied up in unpaid invoices, a huge financial burden for SMEs in a turbulent economic climate. Waiting 120 days for customers to pay their invoices can put significant cash strains on business owners, making invoice finance a great funding alternative.

Invoice finance allows businesses to use their unpaid invoices as a way to fund growth and raise capital.

There are different types of invoice finance available, so it’s important to choose a facility that works for your business.

What is invoice factoring?

Invoice factoring is a type of invoice finance that sees an invoice factoring provider lend against your customer invoices. This allows you to receive most of the invoice value immediately rather than waiting weeks for payment.

Your customers will be aware that you’re using invoice factoring and payments from your customers will usually go into a bank account controlled by the factoring provider.

A distinctive feature of invoice factoring is that lenders tend to have closer involvement. They will provide ‘credit control’ services, ensuring your customers pay on time and allowing you to spend time growing your business and not chasing debtors. As well as this, invoice factoring providers can credit check potential customers, helping to avoid bad debts.

What is invoice discounting?

Invoice discounting enables businesses to continue dealing with all customer communications directly. Unlike invoice factoring, lenders won’t chase up any late payments with an invoice discounting facility. In fact, your customers won’t realise that you’re using an invoice finance facility. For this reason, invoice discounting is sometimes known as confidential invoice discounting.

Many businesses like the confidentiality aspect that comes with invoice discounting. However, choosing this kind of invoice finance is much more hands-on time consuming. With discounting, your business will still be responsible for chasing invoices and managing your own credit control.

Selective invoice financing

A third invoice finance option is selective invoice financing. This form of invoice finance differs from others as it doesn’t involve an agreement for the whole sales ledger. Instead, selective invoice finance allows you to choose specific invoices that you’d like to finance whilst dealing with the rest as normal.

This service is more popular amongst businesses with a healthy turnover and a longer trading history, whereas smaller businesses trading with other SMEs may tend to opt for invoice factoring or invoice discounting.

How does invoice finance benefit your business?

If you operate within a business that often sees cash tied up in unpaid invoices, then invoice finance can provide several benefits. Some include:

  • Improve cashflow
  • Flexible funding
  • Quick access and fewer limitations
  • Less risk to assets
  • Better purchasing power

Applying for invoice finance is a stress-free, seamless process. Firstly, you’ll need to identify which facility is best suited to your business based on its history and needs. Our team of experts have extensive experience when it comes to securing funding for businesses across a variety of sectors. Once you’ve selected your facility, simply get in touch with us and we’ll take it from there.

How can PMD help?

Still not sure which facility is right for you? Maybe we can help.

We strongly believe that business owners shouldn’t be held back by financial constraints. As an industry leading commercial finance broker, our dedicated team are knowledgeable in a range of business finance solutions. With access to a panel of over 150 lenders across all asset classes, we can secure the right funding package for the needs of your business.

To find out more about the service we offer and how we can support UK SMEs, get in touch with us on 0161 633 2548 or complete our enquiry form. For the latest industry news and company updates, head over to our LinkedIn page.

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