REGIONAL MARITIME UNIVERSITY

Funmilayo Lidel Omojowo

International Finance

Misl867623

14th October 2022

DIFFERENCE BETWEEN INVOICE DISCOUNTING AND FACTORING

INTRODUCTION

Factoring and invoice discounting are alternative finance methods and account receivable

management policies. The concept of utilizing a business's outstanding accounts receivable

as a guarantee for a loan provided by a financing company is referred to as invoice

discounting. A company sells an invoice to a third party during the transaction of invoice

discounting. The finance company assumes responsibility for obtaining the full payment from

the buyer while the business receives a portion of the amount billed to the client immediately

on issuing an invoice. Businesses can improve their cash flow and working capital cycle by

selling their invoices and gaining rapid access to cash. For companies that cannot wait for

their customers to pay their invoices, invoice discounting is a popular financing strategy. It is

a very popular substitute for conventional financial instruments like loans and overdrafts.

Discounting invoices quickens cash flow, Companies can obtain money without having to

possess expensive asset. Both large and small enterprises can use it, even if they were

previously turned down for regular bank financing. The financing provider offers a flexible

funding solution and adjusts to the needs of the business.

Factoring allows firms raise money through the value of their unpaid bills. For instance,

expanding enterprises frequently discover that factoring is a more adaptable source of

operating capital than overdrafts or loans. Using more complex borrowing systems and

outsourcing your sales ledger processes are both options provided by factoring. Customers of

a particular company are informed of the transfer of debt from the sellers to the Factor as a

result of the lender, underwriting the increase of credits by acquiring their accounts and notes

receivables. By transferring the credit evaluation and collection work to Factors, factoring
also enables management to concentrate more on core business functions like manufacturing

and marketing.

BODY

While factoring firms generally buy the outstanding bills outright, invoice discounting is a

loan guaranteed by your unpaid invoices. This is a crucial distinction since it gives factoring

businesses credit control, allowing them to interact directly with clients. By effectively

speeding up the cash flow from clients, invoice discounting allows businesses to get paid

practically immediately after issuing the invoice rather than waiting for them to pay within

their typical credit periods. This might be a huge benefit for businesses who are severely cash

strapped.

Factoring companies won't need to repay the funds if the company sells an invoice to a

factoring company and the customer later declines to pay. invoice discounting is relatively

rare because invoice discounting is a loan rather than a sale, which implies that the money

must always be repaid.

In addition, factoring firms will perform credit checks on your clients before approving the

purchase of your bills, unlike invoice discounting firms. Your capacity to collect on your bills

moving forward should be improved by being able to recognize and eliminate poor payers

CONCLUSION

Generally, factoring is a safer choice for lenders over invoice discounting. As a result, big

businesses with a consistent and trustworthy clientele are more likely to adopt invoice

discounting. Contrarily, smaller businesses typically employ invoice factoring because it is

easily accessible rather than because it is a preferred method. The requirements and

conditions of businesses firm will ultimately determine the ideal invoice financing for

business option.