Invoice discounting and invoice factoring are pretty similar to each other, so it is understandable why people often get confused between the two. Both of them are methods of invoice finance. A simple and basic difference would be; Invoice discounting is chosen by established businesses or collection departments while invoice factoring is chosen by others.
Invoice factoring is also known as 'factoring' or 'debt factoring’. In this process, businesses are to sell their outstanding invoices to a third-party finance company. Outstanding invoices are the accounts receivable while the finance company is a factor.
The factor then goes ahead and buys the invoices for a percentage of 60% and 80% of the total value. The factor then takes complete control of invoice payment collection, managing the business' credit control, and processing invoice payments.
Invoice factoring has now become an alternative to business funding.
If your cash is tied up in unpaid invoices and you need instant access to cash, then invoice discounting is the right process for you. So, when you invoice a client, you will receive a percentage of the total from the lender, this percentage will provide your business with immediate cash flow. Simply put, invoice discounting is the easiest form of invoice finance. Invoice discounting is where you sell unpaid invoices to a lender/investor and they give you the bill amount in advance. This can be the entire bill or a part of the bill amount. When your customer pays the invoice amount to you, the lender/investor pays the remaining balance minus their fee.
Invoice discounting benefits a business' working capital as around 80% of the advance invoice can be converted into cash.
The customer is usually aware when their invoice is being factored however, in invoice discounting, the customer is not usually aware.
In invoice factoring, the invoice is collected by the finance company while in invoice discounting, it is collected by the business itself.
The customer is usually aware that a third partythe is involved in invoice factoring but when it comes to invoice discounting, the process is confidential and the customers are unaware.
The customer directly pays the factor-company in invoice factoring whereas the customer pays the business in invoice discounting.
Services like collections service and full sales ledger are available in invoice factoring however, they are not available in invoice discounting.
