And the winner is! It depends!
Both an invoice discounting and factoring facility will release up to 85% of your unpaid invoices on a revolving credit basis. In theory both facilities will grow as your turnover increases providing you with valuable cash and working capital. In our opinion both are far better than a bank overdraft which is not as flexible and will be capped depending on how profitable or the level of security available.
Both factoring and invoice discounting charge an interest rate for the amount of money that you borrow which is comparable to a bank overdraft. If you don’t use the facility than there will be no interest payment. The rate of interest may vary from between one and a half percent over base to as much as three percent over bank base rate. Some finance companies charge their interest rate to Libor which at the moment doesn’t make much difference because both are about the same. Beware some finance companies charge a minimum base rate so you need to double check the small print.
The main difference is that factoring provides credit control whereas invoice discounting is provided in a confidential manner and provides a cash flow facility only. As such the service fee with a factoring company is usually higher than with invoice discounting. With factoring they will call your customers and ensure that payments are received within the ninety days permitted. Although the costs of factoring his higher for smaller businesses compared with the cost of outsourcing credit control it can be a very cost effective form of finance.
However if you are a new start business, have a small net worth or are having trading difficulties you are unlikely to be offered invoice discounting. This is because invoice discounting can be susceptible to fraud. As invoice discounting does not enable the provider to do any checks there have and will be cases of fresh air invoicing.
Tags: Factoring, invoice discounting
