In the world of invoice financing, many people find discounting and factoring confusing. Others say that they are one and the same while there are those that insist their huge difference. If you find yourself in the same state of bewilderment then you are in luck as Working Capital Partners is here to clarify the matter for us.
First things first, let us define what invoice financing is all about. As per definition, it is a type of short term borrowing that allows a business to draw cash against its customer sales invoices before the said customer has turned in their payment. In many cases it is used to improve a company’s working capital and cash flow, provide for emergency expenditures and to hasten collections.
What makes it different for regular forms of borrowing is the fact that it does not require collateral in the form of fixed corporate assets. It can also be processed in a matter of days or even in as fast as twenty four hours. Moreover, it does not appear as a liability in the financial statements but rather a decrease in receivables and an increase in cash. It also frees up the amounts locked in within the invoices relatively earlier than when it should have been, that is at the date of customer payment.
To answer your dilemma about factoring and discounting, the two are alike in two areas. First, both create and bring up the same benefits and advantages. This includes an improved cash flow, available resources, hastened receivable to cash turnover and lesser bad debts to name a few. Second, they both provide for an advance of the value of the invoice/s subjected to them. As for their differences, read on below.
In factoring, the company brings their receivables to the financial provider who in turn provides for the advance which is an equivalent of eighty percent or higher of the invoice’s value. The same provider carries on the task of payment collection from the customers. Once that has been achieved in full, the remaining percent less fees will be forwarded to the company.
On the other hand, discounting still provides for the same advance however the responsibility regarding collection remains with the company. Once collection has been completed, the company then comes back to the financial provider to repay them plus the fees.
Hopefully, the Working Capital Partners have helped clarify things for you after reading through this article.