Difference Between Factoring & Invoice
If you are the owner of a growing business that generates many invoices, you should look into the financing of your receivables through factoring or invoice discounting. Financial institutions may finance 80 to 85 percent of your valid invoices.
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Factoring
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Factoring represents a disclosed credit facility to your customers. If your company is relatively new with few employees and you want to finance your invoices, you need to use factoring. Under this arrangement, you sell your invoices to a factor who pays you 80 to 85 percent of total invoice value. The factor directly collects the invoices from your customers and deducts all charges from your remaining net proceeds of 15 to 20 percent.
Invoice Discounting
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Invoice discounting is an undisclosed credit facility not known to your customers. If your company represents an established strong business entity with good credit management and reliable customers, your best option is to finance receivables through invoice discounting. In this scenario, your company is in charge of invoice collection and control, which is the main difference between factoring and invoice discounting. The handling costs are much lower, which increases the net remaining balance of 15 to 20 percent that you receive.
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Costs
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Normal service charges for the handling of invoices range from 0.75 percent to 2.5 percent with factoring costing much more than invoicing. Interest rates approximate those charged for commercial credit lines.
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References
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- Photo Credit Blue pen in front of invoice image by millann from Fotolia.com finance image by Christopher Hall from Fotolia.com discount banner image by tomdesigner from Fotolia.com
