Running a business sometimes requires the owner to look at all kinds of options to make ends meet financially. There are so many different unexpected expenses that could arise, which necessitate some substantial steps being taken. One of the big challenges that businesses have in this area is collecting the money they are owed from their customers in a timely manner. Sometimes it takes weeks or months for customers to pay what they owe. If a business can find a way to speed up the schedule on which payments are received, it can have a profound effect on the success of the business. Two methods that can be used to speed up collection times are invoice factoring and invoice discounting. While these methods are similar, they have a few key differences to be aware of. Here are the basics of invoice factoring and invoice discounting.
With both of these options, you essentially get an advance from a financing company based on the value of one of your invoices. The amount that you get will be an advance that is less than the value of the invoice total. Then when the customer pays his bill, the financing company is repaid with interest and you receive any amount that is left over.
Invoice discounting is a process in which you receive a payment as an advance from the financing company and you retain control of the invoice itself. When a payment is received from the customer, the money goes directly into a bank account that is managed by the financing company. With this type of arrangement, the financing company sometimes provides you with bad debt insurance. This way, you won't be responsible for paying for the debt if your customer does not pay their bill in the future.
Before a financing company will agree to do this, you'll have to be able to prove that your collection processes, invoicing, and your credit checking process is stellar. If you can't prove that, then you'll have a hard time getting approved for the advance.
Factoring also gets you an advance on the value of the invoice, but the process works a little bit differently. With invoice factoring, you get the advance based on the value of the invoice and the factoring company takes possession of the invoice. The factoring company takes over the process of approving the customer for factoring as well as collecting payments. The customer will start receiving statements from the factoring company and if they don't pay, they'll receive phone calls and other collection actions. This means that all the responsibility is transferred from you over to the financing company.
With factoring, there are actually two different types of factoring arrangements that you could enter into. You could try recourse or non-recourse factoring. With a recourse arrangement, you're still responsible for the advance you receive if the customer doesn't end up paying his balance in the future. You have to pay it back to the company when the customer doesn't pay. With non-recourse financing, you can get access to the advance, but you don't have to pay it back if the customer doesn't repay what he owes. This shifts all of the risk over to the financing company.
There are a few key differences between factoring and discounting of invoices. With discounting, you still maintain control over the credit approval and the collection process. With factoring, you don't have any control over the credit approval or collection process. Your customers will know that you've turned over your collection process because they'll start getting statements from the financing company. If you don't like the idea of turning over your customers to a third-party company but you still want an advance, then invoice discounting may be a better option for you. However, if you like the idea of getting your money quickly without having to worry about collecting the money from your customers, then factoring might be the right course of action.
Regardless of which option you choose, they can both provide you with a number of benefits for your business. Instead of essentially being at the mercy of your customers, you can take more control over your financial situation. You'll be able to speed up the lag time between writing an invoice and getting access to your money. You will be able to pay the bills easier, enjoy your profits sooner, and generally have to worry less about your financial situation. If you're interested in using these types of funding arrangements, check out CBAC Funding. They have an online marketplace where you can get connected with some of the best companies in the industry. You'll be able to find the most attractive terms and work with a company that you trust doing business with.