Introduction
Factoring, Invoice Discounting and Bill Discounting are all ways of raising money quickly. But they aren't the same thing. In this article we'll explain how invoice discounting differs from factoring and bill discounting, as well as how these three options are used together by businesses that want to get access to working capital faster than traditional banks can offer.
They Are Used Simultaneously
Factoring and invoice discounting are often used together, depending on the needs of the business. Factoring is used to help businesses get paid faster, while invoice discounting provides them with working capital. Bill discounting is a form of accounts receivable financing that allows companies to take advantage of their outstanding invoices in order to secure short-term financing.
What is Factoring Finance?
Factoring finance is a form of financing that allows businesses to get immediate access to cash. Factoring is also referred to as ‘invoice discounting,’ and it can be used by businesses that are paid in advance (i.e., those with a steady flow of customers), or those who sell on credit but don't have time to wait for payments.
Factoring is a way for businesses to access cash for their invoices. A factoring company buys the right to collect your receivables and then pays you immediately, minus a small percentage.
What Is Invoice Discounting?
Invoice discounting is a form of financing that allows businesses to get cash for their invoices. Invoice discounting is also known as invoice factoring, invoice funding, and bill discounting.
While it can look similar to factoring or bank loans in some ways, there are key differences between these types of financing:
Invoice discounting is a non-recourse loan. This means that you don't have to make any repayments if the business does not pay you back on time (or at all).
Invoice funding requires little paperwork and allows you to keep getting paid by your customers while waiting for your loan repayment.
What is Bill Discounting?
Bill discounting is when a company receives money up front for its receivables, usually via a loan or line of credit. The lender will value the receivables based on their age and probability of collection, then provide financing that covers this value.
Because bill discounting can be expensive and risky (because you’re relying on someone else to collect your money), it’s often used by companies with good credit histories and strong cash flows who want quick access to cash.
Bill discounting is only available to companies that have a good credit history, cash flow and need access to capital quickly. The lender will discount your receivables based on their age and probability of collection, then provide financing that covers this value.
The above terms aren't all the same.
Invoice discounting and bill discounting are not the same as factoring, despite all three being used to finance business. Bill discounting, where a bank buys your invoices at a discounted rate, is less expensive than invoice discounting. The latter involves the lender buying your invoices at an even greater percentage off than what they are worth.
Factoring, meanwhile, means that you sell your receivables to a third-party - usually someone else in business like you - who then pays you back once they have collected them from your customer. This can be useful if it gives you access to finance without having to borrow money yourself or pay any upfront fees or interest payments on new debt.
The main difference between these types of financing is their cost: invoice discounting tends to be more expensive than bill discounting (although still cheaper than factoring)
Conclusion
Factoring and invoice discounting are two different forms of financing. The main difference is that factoring takes place before a company sells its products or services, while invoice discounting occurs after they've already been delivered. Bill discounting allows businesses to borrow against their accounts receivable, which means they don't need to wait until they have cash flow problems before they can get the money they need.