Introduction

The main difference is who collects the money from your customers. With a factoring arrangement, the factor collects it, and so your customers will know that you are using a factor. With invoice discounting, it is you who collects the money, and so your customers are not aware that you have borrowed money against their debt. For this reason, invoice discounting is often referred to as a ‘confidential’ service.

Factoring does cost a little more than invoice discounting, to compensate the factor for the work they do in running your sales ledger, but this will almost certainly be more cost effective than employing your own sales ledger and credit control staff. (It may also be an effective way of counteracting the bullying tactics of big businesses over timely payment!)

One other way in which invoice discounting is different to factoring is in the size of turnover required. Some factors will accept a turnover of as little as £50,000 a year, but for invoice discounting it needs to be at least £250,000.

Invoice discounting is more or less the same as factoring, except:

• You send a sales day book listing to the discounter instead of copy invoices. Your customers will not be aware that you have discounted your invoices.
• You run the sales ledger, issuing statements, collecting payments and chasing slow payers if necessary. You may have to demonstrate your ability to run your sales ledger in a way that satisfies the discounter.
• Some invoice discounters will only accept limited companies as clients, and insist on securing the debt by taking a debenture. It gives the discounter the right to appoint a receiver.
• You pay the money you collect into a special bank account (trust account) and notify the discounter. The discounter then pays you the balance of the invoice totals, less the agreed charges. These consist of a service fee a percentage of your annual turnover and an interest charge on the funds advanced to you. Once again these are negotiated with each business.

In either situation, customers disputes or returned goods are dealt with in the normal way: you sort out the problems and issue credit notes which will then be notified to the invoice discounter.