Factoring & Invoice Discounting - Differences
Here are some guidelines... to consider
The fundamental difference between factoring and confidential invoice discounting is that the factor’s involvement is disclosed to your customers and the factor takes responsibility for collecting the value of outstanding invoices on your behalf.
This service can provide a useful support to your business but is mainly intended to allow the factor to gain sufficient understanding and control of its security (i.e. your invoices) to allow it to make significant advances against your debtor book. These can be as high as 100% of outstanding invoices less than 90-120 days old.
The cost of such a facility is normally up to 3% over base rate for the money borrowed together with a service charge linked to gross turnover of at least 0.5% depending upon the level of annual sales, the number invoices raised and how many live accounts are on the sales ledger.
Some factors can also offer bad debt protection as part of the package (known as "non recourse factoring") so that if a credit approved customer fails to pay an undisputed debt, the factor will credit you with the amount of the debt up to the agreed credit limit. This service will normally increase the service charge by around 0.5%.
Confidential invoice discounting can provide funding against UK and / or export invoices but is not disclosed to your customers and leaves credit management in your hands. As a result, it is very cost effective.
Unlike factoring, however, the invoice discounters do not have direct control over their security (i.e. the invoices) and therefore prefer to only provide facilities to well- established businesses with good systems, a strong balance sheet and profit track record.
Facilities usually become available when gross sales exceed £250k pa and where tangible or certified net worth is more than £15k.
The cost of such a facility is normally up to 2.5% over base rate for the money borrowed together with a service charge linked to gross turnover starting at 0.1% (subject normally to a minimum charge of £4k - £6k pa).
In recent years there has been substantial innovation in the debtor finance market resulting in the emergence of a range of hybrid products created for clients whose needs cannot be met by traditional factoring or invoice discounting facilities.
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