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The Differences Between Factoring and Invoice Discounting

The Differences Between Factoring and Invoice Discounting

Invoice finance funds

    Collectively known as invoice finance, factoring and invoice discounting release cash against monies already earned. Both facilities can prove to be a vital cashflow solution in this difficult economic climate.

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    Obtaining finance is becoming more of a luxury as the banks are not as credit-friendly as they were prior to the global economic recession. The situation is even made grimmer as the costs of running a business are on the rise. How do businesses survive?

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    Abiding to a professional and concise business plan, using the right accountant and having the right staff are a few key factors that can give a business momentum in the short run. However, cashflow is what makes a business. Careful management of cashflow is key to business continuity and survival.

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    It is a common mistake to confuse cashflow management with cost optimisation. Cashflow management is ensuring that your income surmounts your expenditures at any particular time in the business cycle. Cost optimisation are techniques used by businesses to realise recurring cost savings.

    Many businesses are caught flat-footed as they often have huge chunks of cash locked up in outstanding invoices. Customers could take up to 90 days to complete payment for invoices. Though this may be in the terms of the agreement, your business might be financially strained, with limited working capital to cover payroll, reduce existing debt or cover administrative overheads.

    This is where factoring and invoice discounting are here to help. Instead of waiting 30-90 days for customers to settle their bills, either facility can release up to 95% of the value of your outstanding invoices, usually within 24 hours of raising the invoices. Both facilities work in a similar way – release a pre-arranged percentage of the sales ledger almost immediately. However, they differ in the following ways:

    1. Because the funds are advanced against monies to be paid, there’s a credit control function midway through the process. A factoring arrangement allocates the credit control task, including chasing customers for payment to the finance provider. Invoice discounting allows the business to manage its clients and outstanding payments.
    2. Based on 1) above, invoice discounting is tailored to larger businesses with turnover in excess of £250k and in-house credit control systems. On the other hand, factoring is a particularly attractive option for smaller companies, including start-ups.
    3. With invoice discounting, the customers are unaware of the lender’s involvement. Moreover, factoring is typically a disclosed arrangement as the customers are notified of their invoice payment.

    Advantages of Factoring

    1. The funds released improve your cashflow position and the additional working capital created enables your business to expand.
    2. Factoring boosts your bargaining power, enabling you to capitalise on early vendor opportunities and discounts.
    3. The cash advanced grows alongside your business. This means that as your business grows, you could have access to more funding.
    4. The credit control function outsourced to the finance provider allows you to concentrate on growing your business.
    5. Unlike other forms of commercial finance such as bank overdraft, factoring could be a flexible funding facility for start-up companies.

    Advantages of Invoice Discounting

    1. The funds released improve your cashflow position and the additional working capital created enables your business to expand.
    2. Invoice discounting boosts your bargaining power, enabling you to capitalise on early vendor opportunities and discounts.
    3. The cash advanced grows alongside your business. This means that as your business grows, you could have access to more funding.
    4. The facility is typically administered on a confidential basis. You stay in contact with your customers with them unaware of the funding agreement.
    5. Because the funds are released almost immediately, there’s some certainty about cash projections.

    Other Forms of Factoring

    1. Recourse Factoring: The finance provider manages your sales ledger without any credit protection. This means that if your customers default, you are liable for all credit costs.
    2. Non-recourse Factoring: This is a factoring arrangement where the finance provider takes full responsibility of the sales ledger and bears any risks associated with bad debt. This saves your business the hassle of worrying about customer defaults.
    3. CHOC’s: Factoring is assumed to be a disclosed arrangement with outsourced credit control. However, CHOC’s (Client Handles Own Collections) facility keeps the business in charge of their sales ledger. This could be a cost-effective solution for SMEs with in-house accounting systems.

    Other Forms of Invoice Discounting

    1. Recourse Invoice discounting: The finance provider manages your sales ledger without any credit protection. If an invoice remains unpaid, the finance provider reclaims the cash previously advanced and you take on the credit control function.
    2. Non-recourse Invoice Discounting: You retain full control of your credit control system, but the finance provider offers you bad debt protection for the life of the contract.
    3. Disclosed Invoice Discounting: Your customers are notified of the lender’s involvement, making it a less risky proposition to lenders than confidential ID.
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      Last Updated on June 26, 2020

      25 Easy Tips on How to Save Money Fast

      25 Easy Tips on How to Save Money Fast

      “How to save money fast?” This is the question asked by all of us not in the top 1% of rich people.

      If you are looking for ways to drastically reduce your expenses immediately, first look at what you need to spend money on every week. And I mean really need.

      You don’t really need to order in food. You don’t really need to buy expensive perfume.

      Building from that, you can work out how your regular expenses can be reduced.

      As for irregular expenses, they can also be deceptively costly in the long run. Once-off buys can also be tackled with some prudent planning and a little extra research.

      And remember: a budgeted lifestyle does not mean a bad or boring one!

      But first, understand what budget you can cut down on daily:

      • Regular expenses for the average adult (can be trimmed but not eliminated):
        • food
        • rent/mortgage
        • cell phone
        • insurance
        • socializing/entertainment
        • transportation
        • hygiene products
        • household bills
      • Irregular expenses for the average adult (can be eliminated or cut down a lot):
        • travel
        • clothing
        • medication (*depends)
        • grooming (hair, nails etc.)
        • gifts

      Now, let’s dive right into the 25 ways to save money fast:

      Save Money on Food

      1. Bring a stock of food to the office/work

      Instead of popping out for an overpriced salad and a smoothie, leave a set of basic utensils at the office as well as a stock of non-perishable goods such as tinned fruit, tuna, rice crackers and so on (try to avoid the junk food and this can turn into a pretty great diet!).

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      Stocking up means you won’t forget or say “I didn’t have the time” when you rushed out to work in the morning.

      2. Buy the store-brand version

      Many basic foods, such as bread and milk, will taste exactly the same as their branded alternatives. Go for stuff with minimal additives and preservatives. Meat in a tube is probably insanely unhealthy!

      3. Eat cheaper cuts of meat

      Learn how to tenderize and flavour cheaper meat and fish, and save on the (typically) most expensive item on your grocery bill.

      4. Have group dinners

      If 10 friends put $5 each in the kitty, it’s pretty easy to make a giant lasagne and get refreshments, as well as hang out with your favourite people.

      Save Money in Transport

      5. Get a bicycle

      Save on gas money and bus/metro fares with this underrated mode of transport.

      6. Use public transport and/or don’t get taxis

      Some places can only be reached by car. But as a good practise, check your public transport website and see if any routes pass nearby where you need to get to. Walk as much as you can.

      7. Find the cheapest gas

      Regularly check out where the cheapest gas can be bought.

      Save Money in General Shopping

      8. Shop online

      Not only will you save on the gas or transport fares from going to the shopping mall but you will also find better deals

      9. Sell your old stuff

      Get your unwanted belongings up on eBay ASAP and earn a few dollars.

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      Here’re more ideas for you: 25 Things to Sell to Make a Lot of Money

      10. Bulk buying stores

      For regular non-perishable/slow perishable purchases such as toilet paper, cat food, pasta, washing powder and so on, do an epic stocking-up trip to a co-op or equivalent (my mum used to go to a place that restaurants buy from).

      Be wary of supermarket “deals”, as some have been found to be fraudulent after working out a simple calculation.

      11. Become a flea market/car boot sale/street market guru

      You can find original gifts and develop good negotiation skills at these places.

      12. Generic brand medication

      More often than not, the generic version of paracetamol and other basics work the same as the branded version.

      13. Choose deodorant, not perfume

      It blows my mind when someone drops $70 on a bottle of spray. Stick with a nice deodorant, and not only will you smell just fine but you’ll be sweat-free as well!

      Cut Down on Household Expenses

      14. Printing

      Ink is one of the most expensive substances in the office and coloured ink is doubly so. B

      e more efficient and choose black and white, and if your printer doesn’t have a print-both-sides options, just print odd pages first, re-insert the paper and print even pages.

      Expand the margins of what you are printing as often as you can to save on paper.

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      15. Minimize SMS and phone calls

      A combination of a free chat service such as WhatsApp and a free call service such as Skype can reduce your bill to nothing (so long as you have a decent Wifi connection).

      16. Shop around for insurance

      Most people don’t spend enough time searching for the best insurance deal.

      Keep a watchful eye out for deals and new competitors in the market.

      17. Try re-negotiating your rent/mortgage

      If you have built up a good credit history or a good rapport with your landlord, then chances are a frank chat about needing to tighten your spending could result in lowering your payments. You’ve nothing to lose from trying.

      18. Don’t get a TV

      Invest in a computer/laptop and an internet-only package. You can watch more (and often better) entertainment on the web, and skip the advertisements as well.

      19. Pool your internet bill with a neighbour

      My apartment building is basically a big old house split into three apartments. There are five of us in total. We pool the internet bill, making it crazy cheap.

      Save Money in Socializing, Entertainment And Travel

      20. Have house parties

      Instead of paying for overpriced drinks, set up a series of in-house get-togethers with your friends. Everyone takes a turn, so it’s not always your house that needs cleaning.

      For sound insulation, hang heavy drapes on the walls and windows. For music, invest in a good second-hand set of speakers which you can connect to your computer. Let Spotify or Grooveshark playlists do the rest.

      21. Open festivals, meetups and events

      It never fails to surprise me how much underground stuff goes on around me for free or for very cheap. Find out who runs the blogs and websites that list all the less well-known cultural activities.

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      22. Volunteer

      If you can’t pay for a ticket, volunteer and get to be there anyway.

      23. Housesit

      There are multiple housesitting websites offering you the possibility to avoid paying hotels and skip the discomfort of crummy hostels.

      Save Money on Hygiene and Beauty

      24. DIY beauty

      French manicures, pedicures, waxing, eyebrows… pretty much all of these can be achieved at home (and done well) with some practise. There are plenty excellent blogs and YouTube tutorials to help.

      25. Fewer haircuts/volunteer at a trainee hairdresser

      If you can’t bear the risk of a trainee touching your locks, learn more ways to manipulate your hair as it grows and get haircuts sparingly. Women’s haircuts are outrageously priced in many cities.

      Bonus: Effective Money-Saving Tips for Everything

      Here’s a summary of what you can generally do to save more money:

      • Share/pool resources. Organize a neighbourhood sharing scheme, common resources for your apartment block or with your friends. Not everybody needs an individual lawnmower.
      • Buy energy-saving everything. The easiest way to lower your bills – replace those lightbulbs!
      • Buy in bulk. Be sensible about it (i.e. make sure you have space!), and drastically reduce weekly expenditure.
      • DIY. Skill up using YouTube tutorials on plumbing and many other essential services so you never have to pay for simple problems again.
      • Research a lot before making a decision. Most money-wasting is the result of poor preparation and planning. Don’t shirk this part just because you don’t like it!
      • Use your network. Your network is full of resources that can ease the pain of budgeting. Ask for help.
      • Stop and think. Do I really need it?

      Unfortunately, there are some things that require plain ol’ giving up for the time being. This can include high-cost sports such as skiing, the latest versions of some technologies, the finest brands of food/drinks, premier seats at the opera and most other indulgences.

      What is important to remember during lean times is that when you look back on your life, it will be the experiences that stand out, not the extra comforts.

      Living on a budget can teach you a lot about how much you can really get out of your paycheck. We only live one life, so make the most of every penny you earn!

      More Tips for Personal Finance Management

      Featured photo credit: Unsplash via unsplash.com

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