They’re both ways of releasing money tied up in your unpaid invoices, but is one better than the other? And which form of invoice financing is right for you?
Why choose invoice financing?
There’s money tied up in your invoices. That’s the way it’s always been, of course, but the longer your payment terms and the more ‘flexible’ some clients are with payment dates the harder it can be to stay in control of your cashflow. That’s where invoice financing can help.
Invoice financing gives you early access to most of the money you are owed, ensuring that cashflow remains reassuringly consistent rather than running in peaks and troughs. That can make it much easier to manage business essentials like paying staff and suppliers.
There are two typical ways of operating invoice financing: invoice discounting and invoice factoring. Whilst the two are similar (with the key similarity being that you’ll get early access to the money you are owed) there are some subtle differences.
Invoice discounting
Invoice discounting is effectively a short term business loan. You receive up 95% of the value of the invoice. Once the client pays the invoice you settle the ‘loan’ and pay the lender a fee.
Responsibility for collecting the money you are owed remains with you. Because the lender operates in the background the client remains unaware that anyone else is involved.
Invoice factoring
Invoice factoring operates in almost exactly the same way but the amount received upfront tends to be a little less (70% – 85%) than with invoice discounting. The key difference is the nature of the arrangement. With invoice factoring the invoice is effectively ‘sold’ to the lender. They will be responsible for recovering payment and will be in direct contact with the client so you’ll need to let the client know of the arrangement to avoid any awkward conversations.
Once the invoice is paid the lender releases the remainder of the invoiced amount to you, minus a fee.
Which invoice financing route is right for you?
This comes down to how your business balances time, credit control resource and customer relationships. Where personal relationships are a huge part of the way you operate, or in larger organisations with more resource to direct toward credit control and invoice management, invoice discounting can achieve results without introducing a third party to the relationship (even if they are involved in the finances).
Where time and resources are tight, however, the ability to hand over your invoicing can be a powerful driver towards invoice factoring.
At Just Payroll Services, you can access both invoice financing options. To find out how they could work for you, talk to us.