Modern businesses, and particularly small or medium-sized ones, often face difficulties in maintaining a steady, smooth and predictable cash flow. Young companies on the rise need to invest in order to develop, and this is only possible if operating capital is readily available. Various banking products exist for that purpose, among which factoring and bill discounting, also known as invoice discounting. Their main difference is who, either the factor or the drawer, is responsible for collecting the bills.
When a company raises an invoice with a customer, payment delays are usually between 30 and 90 days. This debt can be sold to a finance company, bank or other, which in turn advances the bigger part of the invoice’s amount to its client. When the debt is later settled, the remaining amount minus the factor’s fee is credited to the company’s account. This allows the factor’s client to benefit from working capital generally within 48 hours after an invoice has been raised. It is important to understand that with factoring, receivables are sold to a finance company which, in turn, has the responsibility to recover the debt.
On the contrary, bill discounting or invoice discounting means that a business sells its invoices prior to maturity to a finance company, at a discount price. Therefore, the whole amount of any invoice is paid to the borrowing company, minus the discount arranged with the lender. It’s then the drawer’s responsibility to collect debts with its own customers, in order to repay the lender. In case of insolvency of a customer, the drawer will have to settle the debt with the finance company.