Invoice factoring and invoice discounting are both solutions available in the financial market today that are designed to help businesses manage their cash flow problems. This solution is normally given to companies that have demonstrated that they are operationally sound and are solvent. The solutions are mainly designed to allow them to benefit from a short term cash injection to meet their day to day obligations.
Invoice factoring typically involves the business selling its invoices to a financial institution or lender together with the rights it holds to the money it is owed under its own specified terms. The biggest benefit that comes with the factoring is the fact that the business gets to access the money owed to it within a much shorter time as compared top if it had to wait for the debtors to pay what they owe.
Typically, invoice discounting carries the same benefits that factoring does and comes with the same features but it is much more confidential compared to factoring. With factoring, the customers get to be informed by the business that it has outsourced the payment collection for the invoices being issued to a certain institution. With discounting however, the customer never gets informed that the payment collection has been outsourced. A large number of the companies that choose to go this route really value this confidentiality and this is the reason most opt for discounting.
With factoring, the institution to which the invoices are sold is charged with the responsibility of following up on the clients and making sure that they make the required payments. With invoice discounting however, the institution is not charged with this responsibility. The business itself will follow up on its customers to make sure that they make their payments. After the customers make the payment, the money will then be paid to the institution to which control of the invoices was given. The process followed for discounting is what makes it unnecessary to inform the customer that a different institution has taken charge of the invoice being issued to them.
Depending on what company values, it can choose to go with either factoring. Most of the companies that go for factoring find it to be a much easier process thus they are more comfortable with it. Those who follow discounting value the relationships with the customers too much and they do not want the direct involvement of any third party in that relationship that is why they choose to go with discounting.