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Invoice factoring vs invoice discounting: what’s best for quick cash flow?

BlogEnterpriseYour business By Duncan Khoury – 31 March 2020

Alternative forms of business finance like quick invoice factoring and invoice discounting are growing in popularity. In fact, the 3rd Asia Pacific Alternative Finance Industry Report found that ‘invoice funding’ was the third-largest type of alternative funding in Australia.

There are two main types of invoice funding: invoice factoring and invoice discounting. Both give you quick access to funding to improve your cash flow, but the main difference lies in who collects the invoice payments.

Let’s take an in-depth look at both invoice factoring and invoice discounting, so you can see which is right for your business.

What is invoice factoring?

Strong cash flow is essential for running a successful business. Having sufficient cash available:

  • lets you maintain good relationships with your suppliers, since you have the funds to pay them more quickly
  • saves you money by letting you access any early supplier payment discounts
  • lets you take advantage of opportunities for growth. 

Invoice factoring helps you improve your cash flow. It’s a type of debtor finance that uses your accounts receivables to free up working capital. It means you get access to the money you’re owed from your customers quickly, without having to wait for them to pay. 

With invoice factoring, you sell your accounts receivable to a financier. In exchange, they give you up to 85% of the value of the invoices upfront – quickly and easily. 

From there, the financier becomes responsible for collecting the debt. It’s up to them to collect payments from your clients and process them. 

Once they’ve collected payment, they pass the rest of the money onto you, minus a small fee.

That means invoice factoring can help eliminate any cash flow blockages.

What is invoice discounting?

Invoice discounting (also known as receivables discounting) is similar to invoice factoring, with one key difference. With invoice discounting, the financier doesn’t take on the responsibility of collecting the debt. Instead, that stays with you.

So which option is better for you as a business? Let’s compare the two.

Invoice factoring vs invoice discounting

Here are some points to consider when you’re comparing factoring vs discounting your receivables.

Invoice factoring

  • Quicker and possibly more cost-effective: since you pass the responsibility of collecting payment over to the financier, invoice factoring is quick and saves your company time and perhaps wages. On the other hand, you forfeit some control over your day-to-day operations.
  • More expensive: invoice factoring companies generally help with sales ledger management such as allocating payments, sending statements and reminder letters. The associated fees are often higher than with discounting, since the financier does more work. 
  • More obvious: your customer knows you’re using a financing facility, since they need to deal with your financier. Knowing this may make some clients wary of doing further business with you.

Invoice discounting

  • You retain more control: with invoice discounting, you manage your sales ledger, which means you keep control of a significant aspect of your business.
  • Smoother cash flow: rather than operating on an invoice-by-invoice basis, invoice discounting usually works with your ledger balance as a whole. This lets you smooth out any cash flow ‘ups and downs’ you may have over the period. 
  • More discreet: invoice discounting also lets you keep your funding confidential from your clients. They won’t know that you’re using a short-term financier.

Whichever method you choose, both invoice factoring and invoice discounting let you tap into your accounts receivables to keep your cash flow smooth and your business growing.

Octet’s Debtor Finance: grow smarter

Octet’s Debtor Finance facility lets you convert up to 85% of your unpaid invoices to cash within 24 hours. 

But is it the right funding choice for you?  It might be a good fit if your company:

  • offers longer payment terms to buyers
  • is seasonal 
  • contracts to large corporations who can set their own (longer-than-average) payment terms.

Debtor finance gives you the cash flow to pay suppliers, buy equipment or expand your business. Because it’s based on your ledger balance, the amount of finance you have available generally grows as your business does.

Unlike many other types of finance, you don’t need to provide security like property. So if you’re a business owner who doesn’t have personal property, or your assets don’t have enough available equity, debtor finance may be your best option. 

It’s flexible enough that you can use it as your primary source of funding, or only for top-up funds. And because it doesn’t appear on your balance sheet, it doesn’t interfere with existing or future loans. 

Octet’s Debtor Finance is available to businesses that range from newer companies to those that are well-established. Ideally, we like to see a turnover of at least AUD 1 million, with 1-2 years of business experience (but don’t hesitate to talk to us anyway if you’re turning over $500,000 or more, as we may be able to help).

Power your growing business with Octet’s finance options

Invoice factoring and discounting are just two ways you can give your business a boost via alternative finance. The right method for you will depend on factors like how big your business is, what your assets are and the amount you need to inject.

At Octet, we can finance all kinds of business. Talk to us today to discover how we can power your business growth. Invoice discounting vs invoice factoring