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Bill Discounting vs Factoring: Which one is the better option?

By Annapoorna

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Updated on: Mar 29th, 2023

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12 min read

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For immediate cash flow demands against outstanding invoices, businesses can turn to bill discounting and factoring, two forms of short-term invoice finance. 

Credit management, expenses, privacy, and agreements are areas where invoice discounting and invoice factoring diverge. One must be familiar with their respective definitions to differentiate between invoice discounting and invoice factoring.

What is Bill Discounting? 

Bill discounting or invoice discounting is a method through which companies get cash against unpaid bills by approaching a trade finance company. This approach to invoice discounting aims to speed up a company's working capital by enhancing cash flow management.

This kind of invoice discounting ensures total discretion concerning a company's clients. Furthermore, invoice discounting allows uncomplicated cash withdrawal with a short payback time. In addition, the expedient and uncomplicated processing of import and export invoice discounting makes it one of the most sought-after services among exporters and importers. 

What is Factoring? 

A company will sell its unpaid invoices to a factoring agency as part of the factoring process. This is distinct from the practice of discounting bills of exchange. Factors that take over credit management and client payments after purchasing an account receivables book.

When companies choose to factor as one of their alternatives for invoice financing, they tend to get a large percentage of the invoice amount at an earlier date. Not only does this assist an organisation in fulfilling its financial obligations, but it also boosts its finances by reducing bad debts.

Differences Between Bill Discounting And Factoring 

The difference between bill discounting and factoring is outlined below.

Particulars Bill Discounting Factoring 
Payment Invoices are paid directly to the vendor business by the customer.The invoice is paid to the factoring business by the customer.
Used By This facility is used by medium-sized to large businesses.This facility is used by small to medium-sized businesses. 
Responsibility The business is responsible for collecting its bills.The factoring business is responsible for invoice collection.
Credit Control 

Bill discounting services have no credit control authority.

 

In this process, factors obtain entire control over credit.
Funds ReceivedCreditworthiness and accounts receivable determine the amount that a firm receives from a trade finance company.

In this instance of factoring, a company may receive up to the value of its book debts.

 

 

Parties ConcernedThere are three parties engaged in bill discounting: the drawer, the drawee, and the payee.The participants in factoring are the factor, the debtor, and the customer.
Confidentiality Customers of a business are unaware of the presence of any bill discounting firm since invoice discounting service providers maintain strict secrecy of the deal.As clients pay directly to the factors, there is no amount of discretion involved in this factoring process.
Governing Body The Negotiable Instrument Act of 1881Not specified 

 

Factors When Selecting the Right Invoice Financing

When comparing invoice financing options, there are a variety of considerations that need to be evaluated before deciding which option is best for your company or organisation.

  • Nature of Business 
  • Capacity for credit management and control
  • Immediate financial demand
  • The scale of business operations 
  • Power to control the sales ledger
  • Capacity to maximise the use of company resources.
  • The industry in which the company conducts its operations: Invoice factoring is helpful in many different sectors, including transportation, construction, wholesale, and manufacturing.

 

Invoice Discounting vs Factoring: Which suits you better?

It all comes down to the specifics of your company. Many important factors include your company's size and its capacity for efficient management of its sales ledgers.

  • For instance, factoring is usually the preferable alternative if you have a small firm with a history of credit management and payment collection issues. In general, factoring is the more reliable option for these firms due to the service's enhanced credit control. However, this may reduce your profit margins marginally, and your provider may need credit insurance (insuring against bad debt).
  • Larger firms with greater resources are more likely to discount invoices, but this changes as the model evolves. They have previously developed effective credit control procedures. Invoice discounting is the superior option if you want to preserve your most important client connections. Consider credit insurance as well.

FAQs on Bill discounting and Invoicing factoring

What risks are associated with invoice financing?

Involved risks include:

  • Failure to compute frequency and related expenses.
  • Ignorance of hidden costs.
  • Please analyse the effect of invoice financing on customer relations.
  • Poor selection of a financing firm or platform.

What advantages does invoice financing offer?

Whether invoice discounting or invoice factoring, advantages include:

  • Improved cash flows
  • Faster money
  • B2B company eligibility
  • Credit control strength
  • Parallel financing development with business size

Is invoice discounting more costly than factoring?

Invoice discounting is more affordable compared to factoring. This is because the company also pays for an outsourced collections department.

Is invoice discounting safe?

Invoice discounting is one of the most secure solutions for invoice financing. It includes little risk and favourable short-term rewards as the company diversifies its portfolio.

Which is riskier: invoice discounting or invoice factoring?

For lenders, invoice discounting is a riskier business than invoice factoring. Therefore, invoice discounting may be used by larger businesses with dependable and consistent customers.

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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