Factoring vs. Invoice Discounting

Both factoring and invoice discounting can be described as a way to get immediate cash by selling accounts receivable to a third party, usually a finance company. In fact, both methods are more similar than different.

Factoring, also known as asset securitization, is an outright sale of receivables to the finance company. The company gets the money and the finances of the company collects debt, keep interest and receive a discount on top of that, for their work. Invoice discounting can also be called to a sale of receivables, but in this case, the administration of claims and their collection does not change hands. The company has earned income still has that responsibility.

Here are some questions that are asked to choose which method is best for your business:

1. Worried about the cost of raising your company? Are the hands? “The total area of collections with a competent and reliable? If you think your company would be better to reduce the amount of resources devoted to this function, factoring is the best option for you, as much of it, but not everyone can be downloaded to the financial institution. If you already have a good working collections department in place, they could qualify for invoice discounting. Thus, its staff and procedures for collections to remain in place. 
2. Aware that the finance company will probably treat its customers with the utmost courtesy, respect and professionalism, is concerned that prefer to deal directly with your company? Perhaps the billing demands are often accompanied by requests for customer service. Your customer is usually unaware of the Sale of its debt at a discount of bills. Not only is aware of a factoring agreement, but is also subject to confirmation calls on each bill by the financial institution at the time. If it’s something that offends you know your customers that you may need to select the invoice discounting. 
3. What are their information needs regarding the collection and the efforts of their clients? Do you collect data at this time and rely on it to make future credit decisions for the client? The finance company can indicate the format and frequency you want? If not, the invoice discounting can be the right choice, if all his techniques for data collection will not be affected. 
4. What are your cash needs? Either with factoring or invoice discounting, you pay in cash immediately. Make collections of himself at a normal pace to give you more real money. But thbe bill relating to discount more than factoring. This, obviously, because the finance company is more responsible and more functions into invoice discounting and factoring. 
5. What is the size of a portfolio of unsecured claims are not your business? How is it diversified? Are there only users who own more than 20% of the total stock of debt? Typically, companies using invoice discounting tend to be larger and have a more diversified portfolio. This may be why they chose to discount bills, but rather a characteristic. Have collections of efforts and data collection methods in place and the cost and difficulty of change can be prohibitive for a factoring agreement. The diversity of the portfolio of finance companies is something we look at both schemes. 

Make an honest assessment on the basis of these factors will help you make the right decision for your business. Soon be on the road to a stable cash flow, whichever you choose.