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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 April 3, 2019

      How to Nix Your Credit Card Debt in Less Than 3 Years

      How to Nix Your Credit Card Debt in Less Than 3 Years

      Debt is never a fun thing to be in. But, there are many actions that you can take that will help you rid yourself of the burden of debt once and for all.

      By coming up with a set plan, eliminating your debt can feel much easier than constantly thinking about it.

      This post will provide some tips on how you can do this to help you nix your credit card debt in less than 3 years.

      Hint: there are ways that are easier than you think.

      1. Consider Consolidating Multiple Credit Cards If Possible

      This may not be applicable to you, but if you have multiple cards – it is something to consider. Keeping up with multiple bills is time consuming.

      It will depend on the balance you have on each. Consolidate ones you can but do not do it to the point that you get too close to the maximum limit. Also, it is ideal to pick the card with the lower interest rate.

      Consider if there are any fees or alternatively, rewards, with transferring a balance to another card. Watch out for fees. Note that some cards offer rewards for transferring a balance to them. This is extra cash that can help go towards paying off your debt.

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      Having one or two cards can make nixing your debt much simpler than keeping up with the balance of a bunch of cards. Keeping track of paying the minimum towards a bunch of cards is time consuming. Spend the time to consolidate instead to make the overall process simpler going forward.

      My tip: Have one main credit card. Have a second one that you use for necessities – such as groceries or gas – that offers rewards for those purchases (a lot of cards do) and set the second one on auto-pay. You should be able to pay off a smaller amount on auto-pay if it is a necessity. If you think you cannot, then you may need to cut down a lot on expenses.

      Why do I suggest doing this? Having one thing set to auto-pay is one less thing to think about. One less thing to waste time on. Same idea with consolidating to one main card. Tracking down too many is a hassle.

      2. Try to Pay the Full Balance You Spent Each Month at the Very Least

      You need to pay off the amount you are spending each month when that bill comes in. This is the amount you spent THAT month.

      Do not let the debt keep accruing while you work on paying any unpaid debt that has accrued. It will become a never-ending battle. Try as best as you can to be current on paying for each month’s expenses when that month’s bill comes out.

      If this is a strain, consider why. You may need to cut expenses. Or you may need to consider other cards. Or look at where this money is going.

      3. Pay Extra When You Can – Every Small Amount Counts

      This cannot be emphasized enough. If you are looking at a lot of credit card debt, it can look daunting, but each extra amount that you can put towards the debt will really add up – no matter how small it is.

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      It does not just reduce the principal amount that you have left to pay off, but it reduces the amount that is collecting interest. You will always save money with that reduced interest.

      4. Create a Plan on How to Pay Extra

      Back to the main point, having this plan is giving you one less thing to think about.

      This plan should be a plan that works for you. If it does not work for you, your spending habits, and your views on debt, then it will not be an effective plan.

      For instance, if a set plan of an extra $50 (or another amount that you know you can afford) works for you, then do that. Set that aside every month and pay that extra amount. Treat it like a bill. Choose an amount that works for you and pay it like clockwork as though it was a bill you had to pay each month.

      Little amounts will not nix it entirely, but they will help tackle it and having a set plan can make it less of a chore. Creating a new plan of how much to put towards it each month is an unnecessary added stress.

      5. Cut out Costs for Services You Do Not Use

      If you are signed up for subscriptions that you do not use because of some free trial or for some other reason, cut it out. Your overall financial position will look better.

      In turn, that will make cutting your credit card debt easier. Look at your statements to find these expenses. If you do not use them, you may forget you are paying some unnecessary amount each month. Cutting it out can really add up in savings that you can put towards other needed expenses.

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      6. Get Aggressive About It

      Consider these points:

      Depending on the interest and the level of debt, you may need to give up a few indulgences. For example, instead of ordering delivery or going out to eat, cook at home. Everything adds up.

      Other things may be more of a sacrifice. It may be a trip you wanted to go on, or a daily latte habit you’ve picked up. In these instances, consider how important it is to you and if it’s worth the sacrifice. And if it is a costly expense, think whether you can wait to indulge.

      Cutting an extravagant expense can really help make a dent in your overall debt. Try not to add to debt when you are trying to pay it off. It will be a never-ending battle. Make it less of a battle with these tips and it will feel easier.

      Bottom line: Do what you can to make this process easier for you. Implement steps that do this. It takes time now, but will help overall. Also, keep track of your spending and paying down of your debts. Which is the next point.

      7. Reevaluate Your Progress at Set Intervals

      Doing a regular check-in can help you see your efforts pay off or maybe indicate that you need to give this a bit more effort. If you check every 3-6 months, it will not feel so much like a chore or feel so daunting.

      By doing this, you will be able to better understand your progress and perhaps readjust your plan. Bonus: if you see it pay off, it will feel great to do this check-in. You will get there.

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      Finally (and most importantly)…

      8. Keep Trying

      Do not get discouraged. Pushing it off will make it worse. Just keep trying.

      Once your debt becomes lower, each monthly payment will reduce the balance more. Why? You are paying less towards interest. It will be a snowball effect eventually and it will become much easier to manage. Just get to that point. And know once you do, it will feel easier and motivating.

      Start Knocking out Your Debt Today

      The best way to eliminate debt is to get started right away. Begin by implementing the above steps and watch your debt just melt away. Try out some of the above strategies and see what works best for you. Soon you’ll be on your way to a debt free life.

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      Featured photo credit: Pexels via pexels.com

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