What Types of Invoice Financing Are Available?

There are two primary models of invoice financing that differ in ownership and control; invoice factoring and invoice discounting.

Invoice Factoring:

In invoice factoring, the business sells its account receivables to a factoring company to get immediate funding. The ownership of invoices is transferred to the factor, who then handles collections and account receivables. The factor provides generally 70-90% of the invoice value as an initial advance and pays the balance amount minus fees to the business on the realisation of invoices from customers.

Invoice Discounting:

In invoice discounting, the business retains control and ownership of its invoices and customers. The invoice discounter simply provides advance funding of typically 70-90% of the selected invoice value. The business continues to manage its sales ledger and handle collections from customers. On the due date, the discounter collects the invoice amount, deducts the initial advance given and charges a fee before paying the balance amount to the business.

The key differences are that in factoring, the factor takes over the credit control function, while in discounting, the business itself collects dues from customers.