Differences Between Invoice Discounting And Invoice Factoring
Table Of Contents :
1) What Is Invoice Discounting?
3) Which Option Is Right For Your Business?
4) Invoice Discounting VS Factoring - Major Differences In Brief
Invoice discounting and invoice factoring are components of invoice financing that enable businesses to release the tied-up funds in unpaid invoices. Ideally, the key differences between these are based on factors like - cost, credit control, confidentiality and contracts, among others. Nonetheless, to settle the debate of invoice discounting vs factoring, one must become aware of the respective pros and cons in detail and compare the same.
What Is Invoice Discounting?
This funding option helps businesses raise funds against unpaid invoices so that they can meet their immediate working capital requirements. The primary objective of invoice discounting is to improve the cash flow and working capital of a company by releasing tied-up cash from invoices.
Generally, invoice discounting services extend the clause of confidentiality; it ensures that customers are unaware of the sources of funding for the business. Businesses that raise funds through this option are subject to the risk of losing control over venture or sales ledger in any way. irrespective of the size of the organisation, this financing option is a much convenient option for businesses
In this regard, KredX can help you avail easy access to capital through invoice discounting services. We are one of the leading integrated cash flow service providers in India presently working across 120+ cities in the country.
What Is Invoice Factoring?
This particular financing option enables businesses to sell their outstanding invoices to a third-party, typically, a financial institution. Once sold, the factors are responsible for credit control, processing invoice payments and receiving payouts directly from those customers.
By availing the assistance of invoice factoring services, businesses can raise between 60% and 80% of accounts receivable’s amount and meet requirements easily. Such a facility helps firms shorten the working capital cycle and further helps to boost the current cash flow of the company.
Since the factor is responsible for collecting payment directly from the customer, there is no such scope for maintaining confidentiality. Typically, this financing option is suitable for both small and medium-sized businesses.
Which Option Is Right For Your Business?
Generally, the decision to choose between invoice discounting vs factoring depends on a few significant factors. Such decisive factors include -
- Nature of business
- Size of business operation
- Immediate financial requirement
- Credit control ability
- Ability to manage the sales ledger
- Ability to optimise resources
These following are among those industries which tend to prefer invoice financing to raise funds.
- Manufacturing
- Security
- Transport
- Construction
- Printing
- Wholesale
- Logistics
- Recruitment
They may also opt for invoice discounting services to raise funds. Since the decision to pick the most suitable financing option lies with businesses, they should compare all the accompanying pros and cons.
Invoice Discounting VS Factoring - Major Differences In Brief
Both invoices discounting and invoice factoring extend funds against outstanding bills and are a part of invoice financing. Regardless, there are a few distinct differences
|
Parameters |
Invoice discounting |
Invoice factoring |
|
Credit control |
Invoice discounting service providers do not gain any control over the company’s sales ledger. |
Invoice factoring service providers gain full control over the company’s sales ledger. |
|
Value raised |
The amount of money forwarded against invoices depends on the business’s creditworthiness and value of accounts receivable. |
One can raise up to 85% of the outstanding payment via factoring. |
|
Confidentiality |
Cash ledger is entirely confidential. Customers usually are not aware of the involvement of invoice discounting service. |
There is no confidentiality about using this financing option as customers pay directly to the factoring service provider. |
|
Collection |
The business is responsible for collecting payment from its customers. |
The factoring service provider is responsible for collecting payments from customers on behalf of businesses. |
|
Suitability |
Suitable for big and medium-sized ventures. |
Suitable for medium and small businesses. |
|
Cost |
In case the financing is non-recourse, it is somewhat expensive. |
In some cases, it is cheaper than discounting |
Based on this information, businesses can decide from invoice discounting vs factoring, which one is better for them. Regardless, they must factor in their repayment capability, the creditworthiness of customers and credit control strategies to pick the most suitable one.
If you decide to choose invoice discounting, don’t forget to reach out to us at KredX. We offer integrated cash flow solutions and help to access funds within 24 hours to 72 hours*. All you need to do is upload your outstanding invoices on our portal and get them discounted at lucrative terms of services at feasible rates.
FAQs
A. This financing option works out well for businesses which need immediate capital. It is useful for companies with creditworthy customers and a capability to bear processing charges.
A. Both are a part of invoice financing and help businesses to maintain cash flow. It also allows companies to access funds quickly.
A. It is also known as supply chain financing. Typically, it is a funding option that is initiated by the customer to help suppliers finance their accounts receivables at a relatively low rate.
A. In the case of bill discounting, the client pays the outstanding amount before the due date at a discount. On the other hand, in the case of factoring, companies sell off their unpaid invoices to a third party at a discounted rate.
A. It indicates the process of selling unpaid invoices for an amount that is less than the actual amount of the invoice.
