How is Debt Factoring Different from Invoice Discounting?

Posted by Saroj Shah on September 1st, 2022

The lifeblood of any business is a steady flow of finances in and out of the business. It’s what we call cash flow. A healthy cash flow ensures that the enterprise has robust capital without financial constraints. However, maintaining that is challenging, especially for small businesses with budgetary restrictions. The SMEs majorly depend on the payments they receive from their clients/customers. However, most of these payments are late, creating a gap in the cash flow. You can mitigate this by leveraging business financing options like debt factoring and invoice discounting. Keep in mind that both are not the same. How are they different from each other? Let’s explore this through this article.

Understanding Debt Factoring

Debt factoring or factoring receivables is a business financing solution where the business owner sells the receivables ledger to a finance company or private lender, sourcing funding from the same.

Understanding Invoice Discounting

Invoice discounting allows enterprises to source a business line of credit by pegging it against the accounts receivables. You can source funds worth 95% of the accounts receivables.

Debt Factoring VS Invoice Discounting – What’s the Difference?

Here are a few points of difference between debt factoring and invoice discounting.

DEBT FACTORING

INVOICE DISCOUNTING

1. A business owner sells the accounts receivables ledger to the lenders. The recovery of the debts or unpaid accounts becomes the responsibility of the private lender or finance company approving the business financing.

2. The funding no longer remains confidential since the lender will directly communicate with the clients/customers for recovery.

3. The business owner factors its invoice in entirety at a discounted value.

4. Factoring can incur more fees because it involves debt recovery on the lender’s part.

5. Business owners can leverage non-recourse factoring, transferring the debt liability to the finance company or the lender.

1. In discounting, the business owner uses the unpaid invoices as collateral or security to source a line of credit for steady cash flow.

2. The funding can be confidential or non- confidential.

3. Discounting the invoice gives you access to up to 95% of the accounts receivables. The business owner receives the balance once the clients/customers clear their accounts.

4. Discounting costs are lesser than debt factoring.

5. There is no way to secure non-recourse factoring.

You must consider all these differences and assess the compatibility with your business finance needs before applying for either. Consult with a finance broker for a better understanding.

Conclusion

To benefit from invoice discounting and debt factoring for replenishing the cash flow, you need to collaborate with a trusted finance broker like Broc Finance. It’s one of the leading facilitators of business financing solutions in Australia, with an impressive clientele. For years they have been helping enterprises, especially small-scale businesses get financial aid from credible private lenders. Reach out to Broc Finance with your financial dilemma for an easy and effective solution.

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Saroj Shah
Joined: August 1st, 2022
Articles Posted: 8

How is Debt Factoring Different from Invoice Discounting?

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