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Compare Rates For Factoring vs Invoice Discounting

Factoring Overview

Factoring and invoice discounting are both great ways to get quick cash for your company. Both involve drawing against your outstanding invoices or accounts receivable to increase your working capital.

Factoring, also called debt factoring or asset securitization, involves selling your invoices to a third party, usually a bank or financial institution. In exchange for the accounts, you’ll receive up to 85 percent of the total value in cash. After that, the responsibility of collecting the debt lies in the hands of the factoring company.

The greatest benefit to factoring is that you don’t have to wait for invoices to be paid in order to collect the cash you need. In most cases, you’ll receive the cash within 24 hours of signing a contract with the factoring company.

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Factoring Cost

Factoring companies make money by charging interest and transaction fees for each invoice they collect on your behalf. Remember, as soon as the deal is inked, you receive up to 85 percent of the value of all accounts receivable. The remaining 15 percent or more, less interest and transaction fees, is returned to you once the invoice is paid.

Service fees typically range from 0.75 percent to 2.5 percent of turnover. Interest rates are generally from 1.5 percent to 3 percent more than bank base rate.

If an invoice is not paid, responsibility for the debt depends on the terms of your contract with the factoring company. In what’s known as recourse factoring, you are liable for uncollected debts. In non-recourse factoring, the factoring company assumes the responsibility for bad debts.

Factoring Pros

  • Less administrative burden - With factoring companies, the burden of collecting invoices and debts is no longer in your hands. This frees up employee time to focus on other tasks.
  • Third-party collection - Some customers will take debt collection from a third-party more seriously. Some, though not all, will respond by paying their bill more promptly than normal.

Factoring Cons

  • More expensive - Factoring companies charge more than invoice discounting companies because they’re assuming the administrative task of collecting payment for your outstanding invoices.
  • Unfamiliar with customers - Factoring companies don’t know your customers personally, like you do. Some customers won’t be very responsive to debt collection attempts from an unfamiliar company.

Invoice Discounting Overview

With invoice discounting, you receive a short-term loan based on the value of your invoices or accounts receivable, rather than selling them outright to a third party. The responsibility of collecting on the invoices remains in your hands.

Just like factoring, you receive up to 85 percent of the value of approved invoices within 24 hours of signing a deal with an invoice discounting company. You pay back the loan as you collect the outstanding accounts receivable. After each invoice has been settled, the remaining 15 percent or more, less interest and fees paid to the invoice discounting company, is yours to keep.

Invoice Discounting

Invoice discounting companies make money by charging interest and fees. The service fee typically works out to be anything between 0.2 percent and 1 percent of turnover. The interest rate is generally anywhere from 1.5 percent to 3 percent more than bank base rate.

Invoice Discounting Pros

  • Less expensive - Invoice discounting has lower fees than factoring because you’re still responsible for collecting the payments.
  • Customer familiarity - Customers may be more comfortable working directly with your company to pay invoices, rather than a third party.

Invoice Discounting Cons

  • More administrative burden - With invoice discounting, the burden of collecting payments remains on you. Settling invoices can be a difficult and time-consuming process.
  • It’s a loan - Invoice discounting companies lend you money, while factoring companies simply purchase your invoices. The loan will be hanging over your head until all of the invoices are settled.

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