Factoring vs Invoice Discounting (Spot Factoring)

Factoring vs Invoice discounting

We look at the differences between the two traditional types of invoice finance.

Invoice Factoring Differences:

Factoring is generally but not exclusively used by companies that are smaller than those that use invoice discounting, usually with an average revenue of R2,000,000, but some factors will consider startups and businesses with a turnover of R500,000. The credit control function in a factoring facility is outsourced, thus the client has little control over their sales ledger. The factoring facility is disclosed i.e. the debtor will know that you are using a disclosed factoring facility. Spot factoring is offered by some factoring firms and allows clients to selectively factor their invoices. This is not standard practice, most traditional products offer a whole turnover facility.

Invoice Discounting Differences:

Invoice discounting is usually used by companies that are larger than those that use factoring. Different invoice discounters will have different entry requirements but typically revenues must be over R1,000,000. Invoice discounting helps you keep control and confidentiality over your own sales ledger operations. Whole invoice discounting and selective invoice discounting products can be made available by finance providers, however it is a policy of many of the traditional factors to not allow the entire sales ledger to have finance, despite the fact that fees are charged against the entire turnover of their client.

Similarities:

Traditional sources of short-term funding like factoring and invoice discounting tend to lock individual businesses into a captive relationship where they are dictated terms by their funding provider. Examples include:

Whole turnover invoice discounting arrangements
Ongoing monthly services fees, and high arrangement fees
Contractual lock-ins with long notice periods
Onerous security arrangements (debentures and Director personal guarantees)
Facilities being lowered at the whim of the funding provider, usually when they are most needed

Traditional sources of funding also have a prescriptive manner in allocating funds and funding applicants. They turn away high growth businesses with a lack of trading history, or where a business model is poorly understood, as this is judged to fall outside their predetermined risk profile.

There are a range of factoring companies that provide invoice finance services. Companies can choose to use spot factoring rather than whole turnover invoice discounting. This is often more relevant when numerous debtors are excluded in a factoring facility.

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