Discounting vs Factoring

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When it comes to finding a facility to suit the needs of your clients and their businesses, an invoice finance solution is a popular way to boost cash flow while supporting ambitious growth plans.

These flexible funding solutions can quickly raise working capital (often as soon as 24 hours) from unpaid invoices, providing vital access to cash when overheads are looming.

However, it’s important to remember that there are many different types of invoice financing, known as invoice discounting and invoice factoring.

But how do you know which is which? And how can you decide which one is best for your client’s requirements and goals?

In this guide, we’ll give you everything you need to know about invoice financing for SMEs, touching on:

  • What is invoice financing?
  • What is the difference between invoice factoring and discounting?
  • How do these solutions work?
  • Which one is better for businesses?
  • And much more!

So, let’s start by covering the basics.

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What is invoice financing?

In a nutshell, an invoice finance facility allows businesses to borrow against the value of their unpaid invoices.

This capital is accessed from outstanding invoices, producing an upfront payment of up to 90% of its value. This money can be put towards day-to-day costs, keeping pace with outgoing payments, or even used for new investments without dipping into savings.

The benefits of invoice financing include businesses getting paid faster for completed work and not being held back by slow customer payments, which allows things to run much more smoothly.

Another perk of invoice financing is its ability to allow businesses to expand their existing offerings or enter new markets earlier than expected, helping them achieve their goals much faster.

But how does this cash flow solution work in the real world?

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How does invoice financing work?

Invoice finance can be an effective way to secure an instant cash injection, which works by releasing funds against outstanding customer invoices. For businesses that operate within industries where payments are slow (or sometimes missed altogether), these forms of finance can unlock the value held in a sales ledger.

Our finance options allow businesses to access up to 90% of the value of their unpaid invoices in just 24 hours, which is sent straight to their accounts – minus our agreed fees.

At Time Finance, our holistic approach allows us to create bespoke finance packages for each business. 

This means we frequently review the level of funding available, to ensure it’s right for their plans in the immediate future and long term. We can also increase or decrease this level of funding to match their rate of growth as – and when – it’s needed.

But what about those terms we touched on earlier?

Don’t worry, we haven’t forgotten.

Invoice factoring and invoice discounting both sit neatly under the wider term of ‘Invoice Finance’ – so it’s easy to get them mixed up.

Although the two concepts are fairly similar at first glance, there are some crucial things you need to consider before making a firm choice.

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So, what are the differences between invoice factoring and discounting?

To summarise, invoice financing is a method for businesses to borrow against their outstanding customer invoices as a short and medium-term borrowing option.

But you’ll also need to know the two sub-products, known as ‘Invoice Discounting’ and ‘Factoring’.

Other terms for these products include ‘Disclosed Invoice Finance’ and ‘Confidential Invoice Discounting’, which we’ll touch on in more detail in the next section.

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How does invoice factoring work?

Much like its sibling, Invoice Factoring works by helping business owners access capital wrapped up in unpaid invoices. However, it offers a much more ‘hands-on’ approach.

Invoice Factoring – also known as ‘Disclosed Invoice Finance’ – provides a solution that not only frees up to 90% of the value of these invoices but also gives SMEs more time to focus on their plans.

Thanks to a fully-comprehensive credit control service, Disclosed Invoice Financing provides an experienced credit control service that will make contact with customers on behalf of the business. They will take the time to talk to their consumer base about their unpaid invoices, allowing SMEs to focus their efforts on growth plans and other opportunities instead.

This is especially helpful for smaller companies looking for a complete package of support for their sales ledgers while handling existing customer relationships.

As such, it’s a popular pick for those who need a flexible service but do not currently have the internal facility for credit control procedures. It can also be a great way for companies to make sense of a large number of outstanding invoices while stabilising cash flow and establishing revenue.

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Is invoice discounting a good idea?

On the other hand, Invoice Discounting – also known as Confidential Invoice Discounting – offers all the faculties of a traditional invoice finance solution.

But why is it classed as ‘confidential’? 

Unlike Invoice Factoring, Discounting provides a cash advance without notifying customers that a structured finance facility has been deployed.

Although it provides the same cash flow management opportunities, instead of utilising one of our controllers, all invoice management and customer communications will be kept within the business.

This is a salient choice for those who already have internal credit control tools in use, allowing them to keep their financial operations discreet.

But how do you know which one will work best for a certain business?

We’ll talk about this next.

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Invoice factoring VS invoice discounting

Essentially, invoice discounting and invoice factoring are both ways to gain access to cash tied up in unpaid invoices.

But there are a few clear distinctions.

Invoice discounting works, for all intents and purposes, as funding taken out against these outstanding customer invoices, while invoice factoring offers a credit control facility that recoups these late payments on the business’s behalf.

As such, invoice factoring means that SMEs don’t have to chase their customers and can focus on more pressing operational matters.

However, invoice factoring offers further peace of mind while running their operations, as a dedicated controller is managing their credit control processes on their behalf. This can save the time and money that would otherwise have been spent on recruiting an in-house facility, allowing them to focus on more important acquisitions or investments.

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As invoice discounting is a funding product, it means that this capital must be paid back – even if the customer still hasn’t paid their invoice.

As a result, this method is often used by larger companies to help cover a cashflow gap whenever it might occur, while invoice factoring is favoured by smaller enterprises.

But there is help available. For clients concerned with the impact of late payments, additional products like Bad Debt Protection can help. Available on a selective basis for flexible, tailored protection, Bad Debt Protection allows businesses to choose which customers they would like to cover – providing peace of mind and risk reduction when it counts.

To discuss whether this product would work for your clients and to find out more about how we can tailor bad debt relief on an individual basis, get in touch with our friendly and experienced team today.

You’ll be able to make a decision based on your own knowledge and experience of your client’s circumstances, as their needs will determine the best invoice financing solution.

So, if you’re an invoice finance broker who is interested in exploring this kind of financial support for your clients – but are unsure which one will work best – we’d be more than happy to advise.

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Still need more information?

Providing small and medium-sized businesses with the best financial solutions is our team’s specialty.

Whether you’re interested in our full range of invoice financing products, or wondering if we can tailor an agreement to meet your needs, we can help.

You can reach us via email at invoice@timefinance.com or by calling 0161 828 8100.