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If you have a business that caters to sales on a credit basis, then you could avail of invoice factoring or invoice discounting to improve your cash flow. Factoring and discounting are both quite similar, but you can decide after looking at the following factors.
In invoice factoring, you will be selling the entire rights of receivables to the factoring company, i.e. the factoring company will pay you the invoice amount minus its charges and then will collect the payment and interest, if any from the customer, whereas in invoice discounting you will only be financed against the invoice amount. You will still have to recover the invoice amount on the due date from your customer. The processing charges in factoring are more than that in discounting since the factoring company has more work to do. As per your business needs and relations with your customers, you can decide between employing the two of them.
If you feel that you have a good credit recovery team in your organization and if you are apprehensive about employing outsiders who might make your customers uncomfortable when they collect payment, then you can go in for invoice discounting. However, if you have a wide range of credit customers and have been wishing for an efficient collection team, then you can go in for invoice factoring, since they can concentrate solely on collection of payments.
That way, you can free your collection staff to do some other work and you will also be free of day-to-day monitoring of your out-standings. The factoring company can send you regular statements regarding payments collected by them and also the receivables statement showing pending payments. In invoice financing, you will still retain control on your collections.
In an invoice factoring arrangement, you will have to inform your customers about your action, since payments would have to be made to the factoring company instead of you. This might make your customers uncomfortable since they would have to make the payment to a third party and might also indicate to them that you are in a tight spot regarding cash flow. Whereas, in invoice discounting, the customer does not have to know anything and you still get your money immediately from the discounting company.
In invoice factoring, the factoring company might also want to approve your customer credit rating before making the sale. This could lead to delays in executing the sale. If you want to expand overseas or have existing clients overseas, then invoice factoring is a safer bet. You will need a good invoice factoring company to care of your needs because if you want to terminate the agreement in between, you might have to arrange money from elsewhere to pay them off.
By and large, there is not much of a difference between invoice factoring and invoice discounting. The main difference is in the control of payment collections and the difference in charges in both is marginal.
So, check out your standing first on the credit and collection side of your company and then decide on whether invoice factoring or invoice discounting is more suitable for your type of business.
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