Invoice Factoring

If you are in business, you can always use more business cash flow. It is tough waiting for clients to pay their invoices. You can always sell your accounts receivables to finance you business capital to get you through each month.

Depending on the business you are in it can take 60 days to get paid. If you are carrying invoices worth thousands of dollars each month, it is hard to get through week to week; especially if you are just starting out.

You have some choices. You can either factor or discount your invoices for immediate business cash flow.

Invoice factoring is the outright sale of you accounts receivable. The finance company pays you a percentage of your invoice totals, collects the debt and the interest. They also collect a discount fee as well.

Invoice discounting is selling your accounts receivables but you still collect the debt from your client. The administration of the debt stays with you.

How to choose between Invoice Factoring or Discounting

So how do you choose between the two – is invoice factoring or discounting the right thing for your business. Here are some things to think about before you make a choice:

1. Do you want to be bothered with chasing clients for money? How much does it cost you to chase your money? Do you employ someone purely to remind clients their account is overdue? If you want to chase your invoices, then discounting your accounts receivables may be the right decision. But if you don’t want to staff a collection service to recover your money, then invoice factoring takes the hassle out of getting your invoices paid. Remember to weigh up the costs of both options before making a decision.

2. Does selling your invoices to a finance company raise concerns that your customers would rather deal with your company directly? With invoice discounting, your customers need never know. But, the invoice factoring finance company will call your clients to confirm the amount they owe on your invoices. If you are worried how this may appear to your customers then invoice discounting may suit you better.

3. How much cash do you need? Look at it this way. How much cash do you need and how much do you need it? The least expensive way is to do everything yourself. Invoice factoring is the most expensive alternative as the finance company takes the debt over completely. It all depends on how much time and whether your business is setup for debt recovery. If it is, maybe invoice discounting is the way to go.

4. Consider how many accounts receivables you hold. How diverse is your client base? Does any one customer make up the bulk of your total invoice amount? Businesses that discount their invoices are larger companies with a portfolio spread across a diverse range of clients. Most of these companies have a fully functional debt collection department in place. Can you compete with this?

Take all these factors into account when you assess whether invoice factoring or discounting is the best alternative for you. Whichever one you choose, you business finances will be in better shape and it will help your business grow.

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