In both factoring and invoice discounting the lender will provide you with funding known as an advance against the value of the cash due into you from your debtors.
As you then forward them new sales invoices and they receive your debtors' payments on a daily basis, the total advance they are prepared to give you will change from day-to-day. Deducting the previous day's outstanding advance from the total advance they are prepared to make today gives you your current availability, which is the amount of cash you can ask the lender to send to you (or 'draw down').
Whilst each involves borrowing against the security value of your debtors, factoring and invoice discounting differ in how they work. and two of the important ways are set out below.
Visibility and Control.
In factoring, in addition to advancing you money, the lender also takes over management of your sales ledger and credit control and provides you with the service of actively chasing your customers' payments on your behalf. This can in itself be an advantage if your credit control has been poor but you will also have to place a notice on your invoices that the debt has been assigned to the factor and that your customers should pay the factor direct.
This means however that your customers will quickly become aware that you are factoring as they will see the notice and will be contacted directly by the lender about their bills, so factoring is normally a very public form of financing.
Because this can cause some businesses concern as to how their key customers are handled, in some cases factors will allow a 'CHOCs' arrangement for key accounts (client handles own customers) whereby you retain control of the contact with the customer, while some have also gone on to develop 'confidential factoring' facilities.
Invoice discounting differs from factoring in that you continue to run your own sales ledger and collect in your own debtors. As you are continuing to do your own debt collection you can have confidential invoice discounting ('CID') which means that your customers will not generally be aware of the arrangement.
Live and Delayed Adjustment
As a factor is advancing you funds against individual invoices and is running your sales ledger, any adjustments to the amount of lending they are prepared to advance, for example as a result of a change in the value of older debt, is made immediately on a day-to-day basis.
In invoice discounting the lender does not run your collection process and tehrefore does not have a day-to-day understanding of your ledger. Instead they will normally require you to provide a monthly reconciliation of the account showing, for example, any change in the level of debt over 90 days that will need to be disallowed. The lender will then use this information to make any adjustments required to the reserves. As a result you can find yourself suffering a significant adjustment to the funds available as a single hit on submitting the reconciliation, rather than having a daily series of smaller movements as in a factoring arrangement. While they may amount to the same value in terms of cash of course, the size of the adjustment on a monthly basis may in practice be more difficult to deal with.
This difference is likely to disappear over time as one lender has introduced a service which automatically synchronises the lender's records with your accounting system on a daily basis and makes the adjustment required. As a result, this reduces the potential for a large 'hit' following a month end reconciliation and other lenders are likely to follow suit over the next few years.
They also differ as since an invoice discounter is not directly in contact with your debtors this is viewed by lenders as being a riskier form of finance to offer than factoring. Discounters therefore tend to only want to provide facilities to larger businesses, typically with turnovers in excess of £1m and with a positive net worth on the balance sheet.
Some of the key differences are summarised below:
- Visibility to your customers: factoring is almost always disclosed; invoice discounting is usually confidential.
- Debt collection: is part of the package in factoring; with invoice discounting however you remain responsible for this.
- Adjustments to availability: happens 'live' with factoring as the lender is in direct contact with your debtors; usually only happens on a monthly basis with invoice discounting.
- Application: factoring can be used by most businesses with factorable debt; invoice discounting is usually only available to businesses with turnovers of over £1m and a positive balance sheet.
So it's important to match the type of funding to what best suits your business.
Article Source: http://EzineArticles.com/?expert=Mark_Blayney
As you then forward them new sales invoices and they receive your debtors' payments on a daily basis, the total advance they are prepared to give you will change from day-to-day. Deducting the previous day's outstanding advance from the total advance they are prepared to make today gives you your current availability, which is the amount of cash you can ask the lender to send to you (or 'draw down').
Whilst each involves borrowing against the security value of your debtors, factoring and invoice discounting differ in how they work. and two of the important ways are set out below.
Visibility and Control.
In factoring, in addition to advancing you money, the lender also takes over management of your sales ledger and credit control and provides you with the service of actively chasing your customers' payments on your behalf. This can in itself be an advantage if your credit control has been poor but you will also have to place a notice on your invoices that the debt has been assigned to the factor and that your customers should pay the factor direct.
This means however that your customers will quickly become aware that you are factoring as they will see the notice and will be contacted directly by the lender about their bills, so factoring is normally a very public form of financing.
Because this can cause some businesses concern as to how their key customers are handled, in some cases factors will allow a 'CHOCs' arrangement for key accounts (client handles own customers) whereby you retain control of the contact with the customer, while some have also gone on to develop 'confidential factoring' facilities.
Invoice discounting differs from factoring in that you continue to run your own sales ledger and collect in your own debtors. As you are continuing to do your own debt collection you can have confidential invoice discounting ('CID') which means that your customers will not generally be aware of the arrangement.
Live and Delayed Adjustment
As a factor is advancing you funds against individual invoices and is running your sales ledger, any adjustments to the amount of lending they are prepared to advance, for example as a result of a change in the value of older debt, is made immediately on a day-to-day basis.
In invoice discounting the lender does not run your collection process and tehrefore does not have a day-to-day understanding of your ledger. Instead they will normally require you to provide a monthly reconciliation of the account showing, for example, any change in the level of debt over 90 days that will need to be disallowed. The lender will then use this information to make any adjustments required to the reserves. As a result you can find yourself suffering a significant adjustment to the funds available as a single hit on submitting the reconciliation, rather than having a daily series of smaller movements as in a factoring arrangement. While they may amount to the same value in terms of cash of course, the size of the adjustment on a monthly basis may in practice be more difficult to deal with.
This difference is likely to disappear over time as one lender has introduced a service which automatically synchronises the lender's records with your accounting system on a daily basis and makes the adjustment required. As a result, this reduces the potential for a large 'hit' following a month end reconciliation and other lenders are likely to follow suit over the next few years.
They also differ as since an invoice discounter is not directly in contact with your debtors this is viewed by lenders as being a riskier form of finance to offer than factoring. Discounters therefore tend to only want to provide facilities to larger businesses, typically with turnovers in excess of £1m and with a positive net worth on the balance sheet.
Some of the key differences are summarised below:
- Visibility to your customers: factoring is almost always disclosed; invoice discounting is usually confidential.
- Debt collection: is part of the package in factoring; with invoice discounting however you remain responsible for this.
- Adjustments to availability: happens 'live' with factoring as the lender is in direct contact with your debtors; usually only happens on a monthly basis with invoice discounting.
- Application: factoring can be used by most businesses with factorable debt; invoice discounting is usually only available to businesses with turnovers of over £1m and a positive balance sheet.
So it's important to match the type of funding to what best suits your business.
Article Source: http://EzineArticles.com/?expert=Mark_Blayney
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