Factoring vs. Invoice Discounting
- Factoring is generally but not exclusively used by companies that are smaller than those that use invoice discounting, usually with an average revenue of £200,000, but some factors will consider startups and businesses with a turnover of £50,000
- The credit control function in a factoring facility is outsourced, thus the client has little control over their sales ledger
- The factoring facility is disclosed i.e. the debtor will know that you are using a disclosed factoring facility
- Spot factoring is offered by some factoring firms and allows clients to selectively factor their invoices. This is not standard practice, most traditional products offer a whole turnover facility.
- Invoice discounting is usually used by companies that are larger than those that use factoring.
- Different invoice discounters will have different entry requirements but typically revenues must be over £500,000 and in some cases £1 million.
- Invoice discounting helps you keep control and confidentiality over your own sales ledger operations
- Whole invoice discounting and selective invoice discounting products can be made available by finance providers, however it is a policy of many of the traditional factors to not allow the entire sales ledger to have finance, despite the fact that fees are charged against the entire turnover of their client.
Traditional sources of short-term funding like factoring and invoice discounting tend to lock individual businesses into a captive relationship where they are dictated terms by their funding provider. Examples include:
- Whole turnover invoice discounting arrangements
- Ongoing monthly services fees, and high arrangement fees
- Contractual lock-ins with long notice periods
- Onerous security arrangements (debentures and Director personal guarantees)
- Facilities being lowered at the whim of the funding provider, usually when they are most needed
Traditional sources of funding also have a prescriptive manner in allocating funds and funding applicants. They turn away high growth businesses with a lack of trading history, or where a business model is poorly understood, as this is judged to fall outside their predetermined risk profile.
There are a range of factoring companies that provide invoice finance services. Companies can choose to use spot factoring rather than whole turnover invoice discounting. This is often more relevant when numerous debtors are excluded in a factoring facility.