In every business, cash flow is very important. The investor needs to have a healthy inflow of cash so that the business in question can meet orders, take care of overhead costs and generally continue to grow. In cases where operating capital may not be as much as it should be, the owner may have to use some innovative methods to stay afloat.
Two very popular methods are invoice factoring and invoice discounting. These are excellent finance solutions because they can help the business owner with much needed cash in an effective manner. There are some similarities between these two cash flow funding methods but there basic differences too.
Invoice factoring is a sort of financial arrangement in which a finance company provides cash to a business based on the unpaid invoices of that company. The finance company is usually called a factor. In most cases, the factor provides finance to the tune of 80-90 percent of the unpaid invoices. The advantage of this arrangement is that it is very fast. Usually the company can get the cash from the factor in just 24 hours after the invoice is raised. Once the agreement has been signed, the factor takes control of the company’s sales ledger. The factor is also responsible for collecting the cash from customers who have not settled their invoices.
Invoice discounting is very much like invoice factoring. The business owner gets financing from a finance company based on the value of unpaid invoices. This is usually between 80 and 90 percent of the value of unpaid invoices. When the outstanding invoices are paid, the finance company gets paid and gets some charges for the transaction as well.
The differences between the two arrangements include the fact that the company providing finance does not control the sales ledger under an invoice discounting arrangement. Again, the finance company does not collect the unpaid invoices on behalf of the company it is financing. Other differences between the two arrangements include the fact that the charges are less when the business owner chooses invoice discounting. In addition, the company that chooses this particular option stands to receive money as the business grows bigger.
In most cases, the forms of financing discussed above are usually taken by small companies with high turnovers. Both forms of financing are advantageous because they are easier to get than bank loans or overdrafts. Finally, it has to be pointed out that invoice factoring and invoice discounting help small and medium sized businesses to grow.
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