Invoice Factoring – Various Options and Benefits
Financial jargons are often misunderstood by people. This happens because financial processes that superficially look alike actually differ in its nuances. People often tend to confuse cash flow with cash optimisation. While both the terms involve realisation of cash, there is a difference in its applicability. Cash flow management concentrates on income with the objective of keeping the level of cash higher than the expenditures whereas cash optimisation is about methods of generating continuous cost savings. Similarly, there is a fine line of distinction between invoice discounting and invoice factoring which are the two sides of the same coin – invoice financing.
Benefits of invoice financing
· Cash projections become easy as funds are released almost instantly on presentation of invoices.
· Business expansion is facilitated as additional working capital can be arranged by bettering cash flow.
· With money in hand, you are better placed in taking advantage in bargaining that allows you to capitalise on discounts and early vendor opportunities.
· The growth of your business takes in its stride the growth of cash advance that you receive. This means, your scope of funding gets increased along with the growth of business.
· The creditworthiness of customers is what matters as your own credit rating is not considered for invoice financing.
· Start-up companies can avail the flexible funding arrangements to their advantage.
Invoice discounting vs. invoice factoring
The subtle differences between invoice discounting and invoice factoring can be understood from the arrangement of credit control. When you go for invoice factoring, the financier takes the responsibility of realising the outstanding payment and uses its own infrastructure of payment recovery. The process is an open one, as your customers are informed about the arrangement and would have no objection in allowing the financier to chase them for payments.
The invoice discounting process is more discreet and confidential and does not involve your customers. It is essentially an arrangement that only you and your financier are aware of and the responsibility of recovering payments rests on you.
Types of invoice discounting
· Disclosed invoice discounting – The lender’s involvement is notified to customers thereby giving more confidence to lenders.
· Recourse invoice discounting – The onus of credit protection lies with you as you are liable to pay back the advance in case invoices remain unpaid. The credit control function has to be handled by you.
· Non-recourse invoice discounting – Although the credit control system is with you, bad debt protection throughout the tenure of the contract is provided by the financier.
Types of invoice factoring
· Client handles own collection – Also known as CHOCS the outsourced credit control arrangement is transparent to customers. Businesses that can handle the sales ledger on their own can avail this cost-effective solution.
· Recourse factoring - No credit protection is provided in this arrangement in which your sales ledger is managed by the financier.
· Non-recourse factoring - All risks arising of bad debts is borne by the financier that takes complete responsibility of your sales ledger.