Is Invoice Discounting Cheaper Than Factoring?
We are often asked, “Is invoice discounting cheaper than factoring?” It is important to understand what you are paying for in both scenarios. In some cases it may be that factoring is the cheaper option.
Invoice discounting is where funding is provided against your outstanding unpaid invoices. Typically it is a confidential facility although some lenders may insist that it is a disclosed facility. With disclosed invoice discounting, there is an assignment notice on your invoices which notifies your customer of the finance companies involvement.
Factoring is similar. The lender purchases the invoices from you and advances funds against them. However, the main difference is that they also conduct credit control. This will be in the form of month end statements, overdue letters and where necessary follow up phone calls to collect overdue debt. You can appreciate that this is an additional service over and above what invoice discounting offers. This does need to be paid for.
For many invoice finance providers, factoring is perceived as lower risk. The lender is closer to your customers and at less risk of fraud or non payment. A factoring facility offers them a closer relationship with the end debtors and as such more transparency.
So, in most cases, a factoring facility involves more work as it includes the credit control. This means that the service fee may be more. However, it may be that you don’t qualify for an invoice discounting facility with certain lenders. This could mean you need to approach a smaller more specialist provider who is naturally more expensive than a mainstream lender. In this case it may mean that a factoring facility from a lender with better pricing is cheaper than an invoice discounting facility from a more expensive provider.