How to Choose Between Factoring Invoices or Invoice Discounting
Factoring Invoices and invoice discounting are both used to increase cash flow in a business. Although they both have the same end result they use very different methods to get cash to run a business. Factoring invoices involves actually selling the accounts receivables at a discounted rate. Invoice discounting involves using the accounts receivables as collateral for a short-term loan. You should consider a few points as you decide whether to factor invoices or discount invoices in your business.
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Look at how it will affect accounts receivable. Remember, when you factor invoices, your company will not keep administrative control over you accounts receivable. Invoice discounting will allow your business to keep control over the accounts. This is an important deciding factor with managers who are looking for a confidential alternative. Some business do not like customers to know if they are in need of help with cash flow, so they choose to use invoice discounting. With invoice discounting, the customers will not know that a company has taken a loan out on the invoices because the business has maintained administrative control of the accounts.
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Determine what your business will need to improve cash flow. This is an important step in this process. If your company needs an amount that is equal to only a small portion of accounts receivable, short-term invoice discounting may work out best. If the situation calls for a much larger amount of cash, you will need to consider factoring the invoices instead. Factoring Invoices will give you a lump discounted sum for your accounts receivable. You do not need to pay back these types of loans and you will not have to worry about collecting the accounts receivable from customers.
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Compare the cost of factoring invoices to invoice discounting. You can use a factoring broker to tell you what type of cash you can get for your accounts receivable when you factor them. This information can be easily compared with the final cost of invoice discounting. Looking at the loan fees and interest that is involved in invoice discounting can give you an idea of how much you will lose with each option. Compare what the actual value of the invoices are to what you will get when you use invoice factoring. Next, subtract the invoice discounting interest cost and fees from the actual value of the invoices. See which option will be most cost-effective for your business. When you are trying to improve cash flow, the cost of using invoice factoring or discounting can be equally as important as confidentiality.
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