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Both factoring and invoice discounting can be described as ways to get immediate cash by selling accounts receivable to a third party, regularly a finance company. In fact, the two methods are more similar than they are different.

Factoring, also referred to as asset securitization, is an outright sale of receivables to the finance company. The firm gets cash and the finance firm collects the debt, keeps the interest and gets a reduction fee on top of that for its trouble. Invoice discounting can also be termed a sale of receivables, but in this case administration of the receivables and their variety does Not change hands. The firm that earned the earnings still holds that responsibility.

Here are some questions to think in order to select which formula is best for your company:

1. Are you involved with the cost of collections in your company? Are they getting out of hand? Is your collections area fully staffed with competent and dependable personnel? If you think your firm would be good off reducing the number of resources devoted to this function, factoring is the good selection for you, as a lot of it, but not all, can be offloaded to the finance company. If you already have a well-working collections department you might rather select invoice discounting. That way your staff and procedures about collections remain in place.

2. Knowing that the finance firm will unmistakably treat your customers with the utmost courtesy, respect and professionalism, are you nevertheless involved that he may prefer to be dealing directly with your company? perhaps billing requests often come together with buyer service requests. Your buyer is ordinarily not aware of the sale of his receivable to you with invoice discounting. Not only is he aware of a factoring arrangement, but also he is subject to confirmation calls on private invoices by the finance firm on occasion. If this is something you know would disturb your customers you may need to select invoice discounting.

3. What are your current informational needs with regard to collections efforts and your customers? Do you currently fetch this data and rely on it to make future prestige decisions for this customer? Can the finance firm contribute it in the format and frequency you desire? If not, invoice discounting may be the right choice, so all your current data variety techniques will not be disturbed.

4. What are your cash requirements? With either factoring or invoice discounting, you are paying for the immediate cash. Doing the collections yourself at a normal rate would return you more actual cash. But invoice discounting returns you more cash than does factoring. This is, obviously, because the finance firm takes on more accountability and more duties with factoring than with invoice discounting.

5. How large a briefcase of unsecured receivables does your firm hold? How diverse is it? Are there any particular customers who hold more than 20% of the total receivables balance? Generally, fellowships using invoice discounting tend to be larger and have a more diverse portfolio. This could be why they chose invoice discounting, however, rather than a characteristic. They already have the collections efforts and data collections methods in place and the cost and mystery complicated in changing them might be prohibitive for a factoring arrangement. Diversity in the briefcase is something finance fellowships look for under both arrangements.

Making an honest estimate based on these factors will allow you to make the right selection for your company. You'll soon be on the way to a healthy cash flow, no matter which you choose.