Invoice Factoring vs. Invoice Discounting

Invoice factoring and invoice discounting are two options available to companies when it comes to managing their invoice finances. While these two are similar, they can often get confused with one another. 

Factoring is the purchasing of invoices, while discounting is a loan that is secured against invoices. Both have their benefits and disadvantages, all of which we will explore throughout this blog. Keep reading to determine which is right for your business!

What Is Invoice Factoring?

Invoice factoring provides businesses with immediate access to cash through the sale of their outstanding invoices to a third-party financial institution called a factor. When the factoring company purchases their invoices, it helps improve their cashflow and maintain their operations without having to wait for customers to make payments.

The factoring process unfolds as follows:

• Issuing Invoices: A business provides goods or services to its customers and issues invoices with payment terms, typically specifying a due date.
• Factor Involvement: Instead of waiting for the invoices to be paid, the business sells them to a factor at a discounted rate. The factor advances a significant portion of the invoice amount, usually around 70-90% of the total value.
• Factor Collects Payments: The factor takes on the responsibility of collecting payments from the business's customers. When paid, the factor deducts its fee and then remits the remaining amount to the business.

Invoice factoring is beneficial for businesses facing cashflow challenges, seasonal fluctuations, or rapid growth. It offers a quick and flexible way to access working capital without taking on additional debt and offloading some responsibility. 

What Is Invoice Discounting?

Invoice discounting—often referred to as accounts receivable financing—involves businesses taking a loan on their unpaid invoices. They sell their accounts receivable to a lender who then provides a cash advance of a percentage of the value. However, unlike with factoring, the business retains control over its invoice collection process.

The process works as follows:

• Invoice Generation: A business provides goods or services to its customers and issues invoices with agreed-upon payment terms.
• Discounting Agreement: The business enters into an agreement with a financial institution (usually a bank or a specialized lender) to discount its invoices. This agreement outlines the terms, fees, and the maximum amount that can be borrowed against the outstanding invoices.
• Cash Advance: The business submits the invoices it wants to discount to the lender. The lender then advances a percentage of the invoice amount—typically around 70-90%— to the business. The remaining percentage is provided to the business when the customer pays the invoice, minus the lending fees. 
  

Invoice discounting is a flexible financing option that allows businesses to maintain control over their customer relationships and collections process. It is often used to improve cashflow, meet short-term financial needs, or fund growth opportunities. 

3 Main Differences

The main differences between these two types of invoice financing agreements come down to invoice ownership and collection—as well as the client experience. 

1. Ownership of Invoices

In a factoring agreement, the factoring company is buying the invoices. They now belong to them rather than the original business. Invoice discounting is a loan, meaning the original business retains ownership of the invoices. 

2. Responsibility to Collect

A factoring company owning the invoices means the burden and responsibility of collecting falls on them. Conversely, the responsibility to collect unpaid invoices is still that of the original business in an invoice discounting agreement. 

3. Client Awareness

Understandably, clients will then be made aware their invoice has been factored when the factoring company seeks payment. In an invoice discounting situation, a business’s clients will likely not know their invoice has been discounted.

Which is Better For Your Business?

Both invoice factoring and invoice discounting can be useful options when exploring financing for your invoices. However, in most cases, invoice factoring is safer than a loan, meaning it is a more effective way to manage these transactions. 

Shifting the burden of invoice collection is the main reason for this. As you work with a factoring company and offload this responsibility, it will no longer fall on you and your business to chase down late payers. This saves you valuable time and resources so you can focus on running your business accordingly. 

Furthermore, you can typically expect greater cashflow relief using invoice factoring because the factoring company is actually purchasing the invoices. This may come at the expense of higher fees in the long run, but gives you more when you need it. 

However, if you are more concerned about keeping your invoice finance agreement private and/or retaining credit control (a.k.a collection responsibility), then invoice discounting may be the better option for your business. You will likely also save on fees, as factoring companies understandably charge a premium for their collection services. 

You should also be aware of the role credit plays in these transactions. Factoring companies are typically more concerned with the creditworthiness of your clients, as they have assumed collection responsibilities and it reflects their ability to pay. Invoice discounters are more concerned with your personal financial stability. 

So, is invoice factoring right for your business? Or is invoice discounting more appropriate? Ultimately, that will depend on your unique needs, your clients, and your tolerance for risk when it comes to finances. 

Reliable Invoice Factoring With REV Capital

If you have decided that invoice factoring is the right choice for your business, then it’s time to speak to the professionals at REV Capital. We’re a leading invoice factoring company in North America and are more than ready to help you. 

When you partner with REV, you can expect exceptional service and absolute transparency—we never do hidden fees. We provide absolute flexibility to develop a plan well-suited to your business and industry. 

Apply today to get funded! 

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