Invoice Financing is the provision of a business loan which is secured against the asset of an unpaid invoice within Business to Business transactions. A more detailed explanation of Invoice Financing can be found here

This article focuses more importantly on the differences between Invoice Factoring and Invoice Discounting, as they can be quite often confusing and, in some instances, misleading leaving individual business owners choosing the wrong invoice financing for their business.

Discounting versus Factoring

Invoice Factoring & Discounting are the two most known forms of invoice finance! With many differences between the two. However, the primary difference which is a big decision for some business owners is Credit Control.

With Invoice Factoring, you will get credit control included in the facility, but with discounting, you won’t.

What are the main differences?

  • Confidentiality

Invoice discounting is often called ‘confidential invoice discounting’ or CID for short. With this facility, you will continue to deal with your clients in the usual way, and they won’t know you’re using a finance facility which is tied to their invoice.

However, Factoring means your invoice finance provider will deal directly with your clients, so they’ll know you’re using invoice finance.

It is common for businesses to not want their clients to know they’re using a form of finance, an example of this can be fear of reputation or negotiation on future deals; so, confidentiality is an important reason some companies choose invoice discounting.

But there are options with invoice factoring that can allow you to maintain confidentiality or keep control over your sales ledger.

  • What is Client Handles Own Collection Services?

Client Handles Own Collection Services (CHOCS), also known as Client Handles Own Credit Control Services (CHOCCS); is a form of invoice factoring where you maintain control of your sales ledger, which allows you to maintain and nurture relationships with your clients.

This is most beneficial if your business is not eligible for invoice discounting and you want to keep control of your sales ledger.

  • Confidential Factoring

Unlike Confidential Discounting, Confidential factoring will see the lender handle your credit control, but in your business name. As far as your client will be concerned, they will think they’re dealing with your business directly, but in reality, it will be the lender handling the sales ledger. Again, another solution where confidentiality is a priority for businesses

  • What are the risks?

As with any type of business loan, the risk is a major factor and Invoice Discounting and Invoice Factoring are certainly no different. If the lender has no credit control it will have less input over whether your clients will pay within terms (or pay at all), which provides the lender with more risk by advancing you cash based on these invoices.

Typically, you will find discounting is more commonly used by bigger companies with the assumptions of higher turnover and more creditworthy customers, invoice factoring is more often used by smaller firms.

  • How much does Invoice Financing cost?

Some of the UK’s smaller businesses who may not have a finance department may find the biggest advantage to them are the credit control services included with factoring, freeing up time to focus on the business, as opposed to dealing with late payers. However, with extra services comes extra effort and so the lender is likely to charge slightly more for factoring unlike invoice discounting.

  • How flexible is Invoice Financing for my business?

Is flexibility a key-value criterion when deciding your use of invoice financing? Typically, with invoice discounting, a lender will usually get you to finance your full debtor book (i.e. all outstanding invoices). In most scenarios, this works for many businesses, but others will be happier and even prefer to finance specific invoices, which is a much easier process with invoice factoring.

As mentioned earlier in this article, there are other forms of invoice financing and one of those is called selective invoice finance or occasionally referred to as spot factoring. The benefit with this is the ability to choose single invoices, specific clients, or specific projects to fund.

But it is worth noting that selective invoice finance and/or spot factoring are quite hard to secure if your company is small or hasn’t been trading long and is highly dependent on the creditworthiness and risk factor of the client you are wishing to finance against; but, it is more flexible if your cash flow fluctuates (i.e. seasonal business) and you’re eligible.

Is Invoice Financing for me and my business?

There are no right and wrong answers when it comes to choosing a finance facility, but speaking with the right people will ensure that you select a facility that works for and suits your business…remember, there is no panacea and all business loans come with their pros and cons!

Some businesses that like the added benefit or even security of having credit control services, certainly if that business doesn’t have the facility in their everyday operations. It frees up their time and late payments are less likely. Others like to maintain control and to continue dealing with their clients themselves. In most cases the choice between invoice discounting and invoice factoring will not be a tough decision and will simply depend on your business’s size and turnover, whether you’re interested in credit control, and whether you want the invoice financing to remain confidential or not.

Business & Finance News

Keep up to date with all the latest news and information.

Visit Business & Finance News

Knowledge Bank

Learn about the different finance products available and how you can use them in your business.

Visit Knowledge Bank

Blogs

Get specialist views on the industry and product announcements as and when they change.

Read Latest Blogs

Book a free consultation

For a conversation about your business goals and funding objectives

make an appointment