Difference between factoring and invoice factoring

Two question marks on a balance

There is ample confusion among the public regarding the difference between factoring and invoice factoring, due in large part to the language and additionally the many similarities. In this article, we will explain both processes and elucidate their main differences.

 

 Invoice Factoring

Invoice factoring, sometimes called invoice discounting, is the process of selling ready invoices to a third-party invoice discounting company. This third-party company will then transfer you a sum equivalent to the invoiced amount minus a small processing fee, which is often a percentage off the invoice’s value. The fee is typically in the vicinity of 2%, but because you will receive the funds the next day, this fee is very reasonable. Invoice factoring or discounting is also a confidential process that is not communicated with your debtor. If the debtor fails to pay you, it is your responsibility to make up the residual with the third-party.

 

Factoring

Factoring is similar to invoice discounting in that capital is liberated by selling ready invoices to a third-party. However, there is a key difference. The factoring company is takes control of your entire sales ledger and is responsible for chasing up debtors to pay their invoices. In these relationships, the pay out to the company doing the work is usually reduced when compared to invoice factoring, because the third-party is buying the risk for the invoice. With factoring, the company that engages to factor your business will peruse your books to be assured they are dealing with a financially solvent company. Additionally, because a factoring company will be chasing the debtors for payment, these relationships are typically not confidential.

 

Main Differences

The principle difference between invoice factoring and factoring is who’s responsible for chasing debtors. With invoice factoring, the business who did the work is responsible for chasing the responsible party for payment, whereas with factoring, the company factoring the business which did the work is responsible for chasing debtors.

The second difference is that invoice discounting usually results in more money going to the company which did the work.

The final important difference is that invoice discounting can be confidential, whereas factoring is typically disclosed to the debtor.

 

Contact Working Capital Finance for Factoring or Invoice Discounting Services

Working Capital Finance are industry leading professional providers of factoring services and invoice discounting for the auto repair industry Australia wide. We have a solid understanding of how the industry functions and therefore understand your specific requirements. If you are in the industry and think our services might be of use to you, please get in touch with one of our professionals today by calling 02 9968 2328 or contacting us online.

 

Please note: The content of this article should be considered informational and not construed or considered to be actual financial advice.