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Invoice Factoring Vs. Invoice Discounting: Best Invoice Finance Option?

By Annapoorna

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Updated on: Oct 11th, 2022

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6 min read

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Invoice factoring and invoice discounting are invoice-based financing options. Since they provide finance against unpaid invoices, people often confuse invoice discounting vs invoice factoring.

When one compares invoice discounting vs invoice factoring, credit control, cost, confidentiality and contracts are some of the key factors where differences exist. One must know the meanings before understanding invoice discounting vs invoice factoring.

Understanding invoice financing

Invoice financing is used by businesses to generate revenue from their outstanding invoices. The funder can be a bank or other financing company that provides loans against outstanding debtors.  The financing company charges a fee for providing upfront cash to the business. Two main types of invoice financing are invoice factoring and invoice discounting. Whether invoice discounting vs invoice factoring, both result in cash inflow in the organisation. Whether invoice factoring vs invoice discounting, both boost the working capital requirements of the company.

Meaning of invoice discounting

Invoice discounting is a type of financing facility. The invoice discounting company gives a loan to the business at a certain percentage of the amount outstanding in the accounts receivable ledger. The ledger consists of credit sales on which the dues are yet to be paid by your customers. Once the business receives the payment from the customers, it will repay the loan amount along with the fee charged for such a discounting facility. The fee is usually charged at 1%-3% of the total invoice value.

Here, the invoice collection responsibility is undertaken by the business itself, enabling them to control their customer relationships. It is a good option if one is looking to build long-term customer relationships. The government has built an invoice discounting marketplace such as TReDs to ensure benefits are extended to wider markets. MSMEs and companies with no collateral can derive maximum benefits from this programme.

Meaning of invoice factoring

Invoice factoring is a type of financing facility in which the company sells some of its outstanding invoices to the factoring company. The factoring company, in turn, pays around 80-90% of the invoice amount immediately. The rest is paid when customers make the actual payment to the factoring company. The factoring company will deduct its fee when making the balance payment. It helps to resolve the cash crunch faced by small companies.

Additionally, the factoring company provides value-added services of collecting payments from customers and sales ledger management. This facility saves a lot of time and avoids hassle. But one disadvantage is that the customers are aware of this facility, which may negatively impact them as they may think that your company is facing cash flow problems.

Difference between invoice discounting and invoice factoring

One has to compare invoice discounting and invoice factoring services to identify differences between the two. Some of the differences between invoice factoring and invoice discounting are listed below:

ParticularsInvoice factoringInvoice discounting
MeaningIt is a type of financing in which some outstanding invoices are sold to the factoring company.It is a type of financing in which the discounting company lends a certain percentage of the amount outstanding in the receivables ledger.
Used bySmaller companies use this facility.Bigger companies use this facility.
ResponsibilityFactoring company is responsible for the collection of invoices.The business is responsible for the collection of its invoices.
Right over the invoiceFactoring company has exclusive rights over the submitted invoices.Discounting company just provides a loan against the outstanding invoices. It does not have any control over the submitted invoices.
Customer awarenessThe customer is aware of the factoring facility used by the business.The customer is not aware that the invoices are discounted.
CostIt is more expensive because you are provided with a value-added service of maintaining a full sales ledger and invoice collection.It is less expensive as no add on services are provided under such type of financing.
PaymentThe customer makes the payment of the invoice to the factoring company.The customer makes the payment of the invoice to the vendor company directly.

Factors to choose right Invoice financing

While doing invoice finance comparison, there are various factors to be considered before making the right invoice financing choice, whether invoice factoring vs invoice discounting, for your business or enterprise.

  • Nature of business
  • Ability to credit control
  • Immediate financial requirement
  • Scale of business operations
  • Capacity to manage the sales ledger
  • Ability to optimise business resources
  • Industry in which the business operates in. For instance, industries such as logistics, construction, wholesale and manufacturing find invoice factoring favourable.

FAQs in invoice factoring vs invoice discounting

What are the risks of invoice financing?

Risks involved include non-computation of frequency and associated costs, ignorance of hidden costs, non-analysis of the impact of invoice financing on customer relations and improper choice of financing company or platform.

What are the benefits of invoice financing?

Whether invoice discounting vs invoice factoring, benefits include better cashflows, quicker money, B2B business eligibility, strength on credit control and involves concurrent growth in funding with the scale of business.

Is invoice discounting more expensive than factoring?

Factoring is more expensive compared to invoice discounting. It is because the business is also paying for an outsourced collections department.

Is invoice discounting safe?

Invoice discounting can be considered one of the safest options in invoice financing. It involves minimal risk with attractive returns on a short-term basis while the business diversifies its portfolio.

In invoice discounting vs invoice factoring, which is riskier?

Invoice discounting is a riskier proposition for lenders than invoice factoring. Therefore, invoice discounting may be used by bigger companies with a reliable and steady customer base.

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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