Tips

Would Factoring or Invoice Discounting Be a Better Option for Your Business?

February 16, 2015

invoice-finance-665x365[1]Invoice financing can be a great way to secure funds for your business, but it’s not quite as simple as deciding whether or not you want to give it a go. Once you’ve committed to the idea, you then need to do your research and decide between the two different variables that are available to you: factoring and discounting. Both of these options involve a third party advancing capital against outstanding debtor balances, but there are a number of important differences between them.

One of the most important of these is their level of involvement in your enterprise. If you choose a factoring financier, then you hand control of your sales ledger to a third party. It is this entity, rather than you or your staff, who will become responsible for collecting debts. Discounting financiers, on the other hand, are much less hands on, and it’s unlikely that your clients will even be aware of your relationship with them.

But how do you know which of the two would be better for your business?

The Benefits of Factoring and Invoice Discounting

Factoring and invoice discounting share many benefits in common. Although these should play a major role in your initial decision regarding whether or not to use an invoice financier, they should have little part in deciding between the two different mediums, so don’t be enticed into selecting one or the other on this basis.

These shared benefits are:

  • The quick release of hard capital, and all of the attendant benefits that go with it.
  • The ability to secure funding without levying it against other assets.
  • The increased power to negotiate discounts thanks to your ability to make prompt supplier payments.
  • Competitive pricing compared to other funding options.
  • Funding levels that increase with your turnover.
  • Access to professional business advice.

Instead, it is their additional benefits that need to be weighed against each other when making your decision. Factoring comes with an attendant credit control and collection service. This is great for those business owners who are short on time and could do with delegating some of their responsibilities. They can rest assured that these tasks are in the hands of experienced professionals who have a vested interest in their completion.

On the other side of the coin, some businesses will see the hands-off approach of discounting financiers as preferable. These services leave the responsibility of such tasks to business owners, meaning that they never interact with your customers. The advantage of this is that only people that you trust with your brand reputation will be responsible for helping to mould it.

Which Solution Would Be Best for My Business?

In truth, there is no easy answer to this question. The old adage – ‘horses for courses’ – rings true in this instance, with different services suiting different businesses to varying degrees. The important thing is to assess the nature and needs of your individual business, and then decide how much involvement from a third party you’d be comfortable accepting.

Business size also has its part to play. Smaller businesses usually opt for factoring, as they have a greater need for delegating tasks. Larger companies, on the other hand, tend to have greater resources, so they may prefer to take care of debt collection themselves. However, the most important factor remains which of the two will work best for your individual business and its trading ethos.