Invoice discounting and invoice factoring relate to similar forms of working capital financing. You get cash advances up-front for your invoices or receivables. In the United States, the two terms often refer to the same thing - invoice factoring. In the UK and Europe however, factoring companies that perform invoice discounting are completely different than factoring companies that provide invoice factoring.
What is Invoice Factoring?
You sell your invoices to the factoring company. The factoring company buys the invoices and ensuing receivables and pays you up-front. Because the factoring company owns the invoices or receivables, they will collect payments for those invoices. To facilitate collection of receivables, the factoring company notifies your customers to send future payments to the factoring company.
The factoring company manages the receivables. Customer payments go directly from your customers to the factoring company. The factoring company posts the checks against their invoices and track open and paid receivables. They perform all the necessary functions to collect the accounts receivables. They make collection calls, send account statements, chase down payments, check credit, and provide reporting.
You are charged a factoring fee and interest. These may be combined into one factoring rate. You may be required to factor all invoices on a per customer basis.
What is Invoice Discounting?
You sell or assign your invoices to the factoring company. The factoring company either buys the invoices and ensuing receivables or uses the receivables as collateral. The factoring company pays you up-front. The finance company doesn't notify your customers of anything. Your customers are not aware that an invoice discounting arrangement exists. This can be advantageous to companies that perceive confidentiality as important.
You receive your customer payments and pay back the finance company for any borrowed amounts. You maintain control of the accounts receivable collection processes. You submit invoices, collect the receivables, make calls, send statements and post payments. You pay interest on the funds you borrow. Other charges may include maintenance and audit fees. You factor only the invoices you want.
Invoice Discounting Requirements
The requirements for invoice discounting are more stringent than invoice factoring:
- You need significant annual revenue. Depending on the finance company, it might be $1 million or more.
- You must have adequate credit control procedures and accounting systems.
- Your business must be profitable and well managed.
Sometimes, certain situations require the confidentiality of non-notification. Because non-notification involves more risk and complexity than ordinary invoice factoring, it's usually more expensive. If you need non-notification, please call FactoringClub at 866-748-7111.
FactoringClub.com is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.