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Invoice Discounting vs Invoice Factoring: Which One Is Right For Your Business?

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What is Invoice Discounting?

Invoice discounting (also known as Invoice financing) is a funding solution where a business uses its unpaid invoices as collateral to secure a loan or line of credit from a financial institution. In this arrangement, the lender provides a percentage of the invoice value upfront, typically around 80-90%, with the remainder released upon customer payment, minus a fee or interest.

What is Invoice Factoring?

Invoice factoring involves selling accounts receivable or invoices to a third party (factoring company) at a discounted rate. The factoring company assumes responsibility for collecting customer payments and releases an immediate advance to the business, usually 70-90% of the invoice value. Once the customer pays, the factor releases the remaining balance, after fee deduction.

Difference Between Recourse And Non-Recourse Factoring

Aspect Invoice Financing Invoice Factoring

Ownership of Debt

Business retains ownership of invoices, uses them as collateral.
Sells invoices outright to the factor.

Control of Collections

Business retains control over collecting payments
Factoring company takes responsibility for collecting payments.

Customer Relationship

Direct interaction with customers for payments.
Factoring company interacts with customers for payment collection.

Interest/Fee Structure

Interest-based financing with fees on the loan.
Fee deducted from the invoice value by the factoring company.

Risk Exposure

Assumes risk of non-payment from customers.
Factoring company assumes the credit risk for unpaid invoices.

Choosing Between Invoice Financing and Invoice Factoring

  • Invoice Financing: Ideal for businesses wanting to retain control over customer relationships and collection processes while using invoices for immediate cash flow.
  • Invoice Factoring: Suitable for businesses seeking to outsource payment collection and credit risk while unlocking immediate cash flow.

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Written by:

Henry Baker
Henry Baker
Henry Baker, an adept financial & business copywriter in England, boasts a decade-long career collaborating with top-tier UK financial institutions. Renowned for his skill in translating intricate finance into captivating content, he's a trusted authority in simplifying complex concepts for diverse audiences.