When it comes to receivables financing, two options reign supreme: single invoice discounting and factoring. However, the two often get mixed up and mistaken for the other. Today, we look deeper and try to differentiate the two.
Single Invoice Discounting
The method involves the use of a specific customer invoice as a security or form of collateral in exchange for an advanced received which is equivalent to its value. The company gets to use the cash immediately before its actual maturity. Once it has matured and collection from customer is completed, it must then comply with its responsibility towards the financial provider by repaying it of the sum advanced plus fees.
Single Invoice Factoring
The method involves the sale of the rights to collect against a specific customer invoice in exchange for an advance of its value. Such advance is equivalent to at least 80% of its total value and is received immediately. The company goes on to use the fund received. The burden of collection is also passed on to the financial provider. Upon maturity and once full collection is received, the provider forwards the remaining balance less the fees to the company.
In terms of benefits, the two pretty much produces the same perks as follows:
- Both are not a liability. – Both discounting and factoring are not a debt, a loan or a form thereof. They are both asset transactions so they also do not come with interests. The fee is set beforehand and does not compound.
- They hasten collection. – Most providers are able to release cash within a day’s time. The advance also paves the way for immediate cash recognition as companies no longer have to wait for maturity in order to use the funds attributed to the invoice.
- They are a onetime transaction. – Only a single or selected invoice is used in both methods. The choice of which invoice and when to use it shall be completely under the discretion of the company. It does not involve lengthy contracts as well.
- They inject cash into the system. – Its immediacy allows for a quick injection into the cash flow which helps in terms of liquidity and ins strengthening the working capital of the business entity.
We hope we cleared the confusion between single invoice discounting and factoring. So, which of the two are you going for?