Invoice Discounting, to simplify, is a practice of using company’s due accounts received as collateral for loan purpose. We can consider this unpaid amount to be distributed by a finance company. This mode known as invoice discounting is a very short-term approach of borrowing because the finance company can change the value of debt unsettled. The debt amount given by the finance company is low than the amount of outstanding receivables.
Invoice discounting is a method which essentially speeds up cash movement from clients and there is no need to wait for the clients, to pay within their credit terms. The cash is obtained instantly when the invoice is issued. Due to credit crisis, invoice discounting is a main source of working capital finance as the limit of bank financing. Relying on the invoice security from the debtor, invoice finance is more attractive to a bank. As invoice discounting allow businesses to recover cash flow, recompense employees and suppliers, plus reinvest in processes, we can also refer invoice discounting as an approach for business to borrow money based on sums.
So What’s the Difference between Invoice Discounting and Invoice Factoring?
The financial facilities, Invoice Discounting and Invoice Factoring has the capability to release the capitals in your unpaid invoices. Invoice discounting is taken into account by larger and more reputable firms and on the other hand, small businesses and small firms apply invoice factoring.
With Invoice Factoring, supposing the responsibility of managing the sales ledger, other responsibilities of the provider are credit control as well as chasing customers for their invoices settlement.
With using Invoice Discounting, your business holds control of its personal sales ledger and a normal payment method is followed.
Another difference between invoice discounting and invoice factoring is in the range of confidentiality. Through factoring, the invoices of the customers are directly resolved by the Factoring Company. While through Invoice Discounting, customers still identify that a third party is engaged in this.
Is Invoice Discounting Superior?
Choosing the appropriate method whether to go for Invoice Factoring or an Invoice Discounting totally depends upon the business size and also on your sales ledger management capitals.
The benefit of invoice discounting is that it licenses a financer to run business without funds, which is no different procedure than bank overdraft. In invoice discounting, the interest amount is paid by the debtor only on the sum of money used. As there is a tough competition prevailing in the market to range such credit, therefore, there are numerous different products to fulfill the requirements of the client. If you want your own business to contract with debt, then also invoice discounting can be used.
- The service managed is confidential and you remain in interaction with your customers with them unaware of the capital agreement.
- A large number of human resources are succeeded by Invoice Discounting.