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Invoice Discounting and Factoring – what’s the difference?

Lucinda Clancy of Clancy Cashflow Solutions, specialist brokers for business finance solutions, has written the following article which you may find useful.

“I’ve talked to lots of people who are confused about Invoice Discounting and Factoring, and many think they are the same product. Well, they’re not. Let me explain.

Invoice Finance is an umbrella term to describe a number of products including Invoice Discounting and Factoring. It’s also often referred to as debtor finance or receivables finance. The term has become widely used in Ireland and many Invoice Discounters refer to Invoice Finance in their product offering.  However, in the Irish market, many people still use the term Invoice Discounting.

So, what’s it all about?  Well, very simply, Invoice Finance releases cash to a business (up to 85%) from outstanding trade debtors’ invoices as soon as the invoices are raised. The balance, less charges, is paid when the customer pays in full.  The benefit is that the business has immediate access to cash. Invoice Finance suits businesses that are selling goods or services to trade debtors on credit terms and invoicing in arrears.

Although Invoice Discounting and Factoring are often confused, there are key differences between them:

Invoice Discounting ‑ the funder provides a business with cash against unpaid invoices. The business continues to do the credit control and collections function in-house.  The customers pay into a trust account controlled by the funder and the facility is usually confidential, so customers are unaware of the funder’s involvement.

Factoring - the funder provides cash against unpaid invoices AND undertakes the credit control and collections function on behalf of the company.  The facility is disclosed and the customers are required to pay the factoring company directly.

Although Invoice Discounting is more common in Ireland, Factoring and related products are growing in popularity as business owners  are forced to think outside the box due to stricter lending criteria. Also, the benefits of outsourcing the credit control are now more widely recognised, and importantly, people are not so hung up about disclosing their invoice finance arrangements to their customers.

Each product has different qualifying criteria and depending on a business’s needs and financial status, it may be suited to Invoice Discounting, Factoring or CHOCS – a hybrid product, to mention a few.

It’s important to know the differences between the invoice finance products because this helps people to make the right choice.  Hope this clears up any confusion.”

Lucinda’s website is www.clancyinvoicefinance.ie and her telephone number is 01 438 6462 if you wish to discuss financing solutions with her.

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