Factoring or invoice discounting?
Both factoring and invoice discounting are said to be ways by which you can get immediate cash by selling accounts receivable from a third party which is usually a finance company. In fact, the two methods are more similar than they are different.
Factoring is also referred to as asset securitization. It is an outright sale of receivables to the finance company. The business then gets cash and the finance company then collects the debt, keeping the interest and gets a discount fee on top of everything for all the trouble. Invoice discounting or invoice finance may also be termed as a sale of receivables, but in this case, the administration of the receivables and the collection does not change hands. The business that earns the income will still hold the responsibility. With this in mind there are a few questions to consider in order to choose which kind of method is best for your company.
First ask yourself if you are concerned with the cost of collections of your company. Is the process getting out of hand? Are the collections area fully staffed with reliable and competent personnel? If you think that your company would be better off reducing the amount of resources that are devoted to this function, then factoring may be the better choice for you. A lot of the work, but not all, can be offloaded to the finance company instead. If you already have an excellent collections department, then you might choose invoice discounting. This way your staff and the procedures regarding collections remain in place.
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