Factoring vs Invoice Discounting

What is the difference between Factoring and Invoice Discounting?

Posted: 1st October 2014

Both services provide finance advanced against the invoices that clients raise to their customers.  The invoices are assigned* to the Invoice Finance company.

There are two fundamental differences between Factoring and Invoice Discounting:

1.  Factoring is disclosed to the customer.  The client puts an assignment notice on their invoice which asks the customer to pay the Invoice Finance company. 

Invoice Discounting is confidential.  There is no requirement for an assignment notice and the customer pays the client.

2.  With a Factoring facility the Invoice Finance company handles the credit control and chases for payment of the invoice.

With Invoice Discounting this responsibility remains with the client.                                                         

Essentially that’s it, although there are a number of confusing ‘hybrid’ facilities whereby the service can be disclosed and collections rest with the client or the service can be confidential with credit control managed by the Invoice Finance company.

We try to keep things simple:

At Calverton we try to keep things easy to understand and transparent.  For that reason we use the term Business Finance for our agreements.

Our facilities can either be Disclosed or Confidential and can include Credit control or not.  The choice is up to the client.

What's the best solution for you?

That depends on a number of factors; the size of your business, your staff levels and skills.  Essentially, Factoring is more appropraite for young companies who don't have the personal or expertise to manage credit control efficiently.  Outsourcing this function to a factoring company is cost effective.

For larger companies with credit controllers and administration in place then Invoice Discounting is probably more suitable.

The best way to find out is to pick up the phone and talk to an Invoice Finance company.  They should be able to advise you.

If I opt for Factoring, how do I know my credit contol will be handled properly?

This is a good question.  The best way to find out is to ask to visit the finance company and meet the people who are going to be looking after you.  Ask what their average collection days are compared to the industry, this may give you a indication of how efficient they are.  But you also want your customers to be treated professionally and courteously.  If you’re at all unsure ask for a trial period, say 3 months, to see if it works for you and if the finance company lives up to its promises.

 

*Assignment

A transfer of rights to another that gives the recipient the rights that the owner or holder of the property had prior to the transfer.