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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.

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    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 July 20, 2021

      Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

      Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

      Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

      Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

      Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

      In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

      Break Free of Your Finances

      Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

      When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

      Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

      Though it seems hard to believe, it is really very simple to get financial freedom.

      To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

      While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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      Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

      1. Stop Unnecessary Spending

      We often spend money inwardly, instead of objectively.

      For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

      To stop this habitual spending, log down all your spending over the course of a month.

      Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

      This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

      2. Plan a Monthly Budget

      This is a great opportunity to get serious.

      Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

      Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

      3. Cut-up Credit Cards

      Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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      If not, you may want to consider ridding your life of the burden that credit cards bring.

      Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

      Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

      4. Increase Savings

      There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

      It’s good practice to save up to 15% of your income.

      Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

      Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

      5. Invest Wisely

      Consider investing in funds.

      Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

      To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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      Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

      6. Invest in Gold

      There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

      You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

      Another way to invest in gold is through ETFs (Exchange Traded Funds).

      These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

      With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

      7. Stash Emergency Funds

      Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

      If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

      Make it hard to get your cash.

      Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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      8. Find Fabulous Mentors

      Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

      If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

      There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

      9. Be Extra Patient

      Patience is the key of financial success.

      Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

      So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

      Financial Freedom for All

      Anyone can achieve financial freedom, regardless of their financial circumstance.

      Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

      Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

      Featured photo credit: rawpixel via unsplash.com

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      Reference

      [1] Hartford Gold Group: IRA Retirement Accounts

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