What is Invoice Factoring and Discounting
A smooth cash flow is a prerequisite to a good business. Businesses have taken recourse to various kinds of financing to ensure that and the present times have seen the emergence of some alternative and non-traditional financing tools. Invoice Factoring and Invoice Discounting are two such tools.
Invoice factoring is a process wherein unpaid invoices are sold to a third party or factoring organization so that the business receives finance against the unpaid receivables and invoices. This tool helps to release working capital for better cash flows and seamless business operation and expansion. The factoring company then waits for the realization of the payments from the customers.
Invoice discounting is a financing process where unpaid invoices are sold to a third party at a discount. The discount depends on the length of the payment term and also the creditworthiness of your customer from whom you have receivables unpaid. The discount is usually around 1.5% to 5%, estimated for every ten days until the date of payment. Invoices that belong to the more creditworthy of your debtors would get lower discount percentages and vice versa. The amount lent via invoice discounting can be realized later on by the company that purchases it from you via two processes, viz. self-collect, where receivables are collected by your company, or notification sale, where the invoice discounting company collects the receivables directly from your debtors on its own.
Both financing processes are particularly beneficial for new and small businesses that find it difficult to meet financial criteria of traditional lending institutions or tools. Both these financial tools are mostly independent of the creditworthiness of the borrowing business itself and rather it hinges on the financial strength of its customer base. Since many new businesses do have customers that are financially quite strong and conventionally creditworthy, invoice factoring and invoice discounting helps them cash on their customer list