In today’s financial world words like crisis and economic recession are often thrown around. Companies are always seeking new ways to rejuvenate their businesses and maintain financial stability. Within the financial services industry both factoring and invoice discounting have increased in popularity due to the benefits they provide in an otherwise time consuming and costly process.

These two services help facilitate the release of funds that a business may have in any outstanding invoices. A key similarity between the two is that both rely on the use of a third party company, such as Touch Financial, advancing funds against the outstanding invoices. Although both do in essence achieve the same end result it is the financial arrangement between the third party company that differs significantly.

The main difference between factoring and invoice discounting is how the third party company interacts with the client. We see that with factoring the company in question sells their invoices and so they effectively transfer ownership to the third party company. The third party will then release funds to the company who originally held the invoice generally a large percentage of the original invoice somewhere in the region of 85%.The remainder of the purchase price is then held until the payment by the account debtor is made, minus the third party companys fee for this service. As this service also include processing payments the customer is aware of the factoring company’s involment with your business.

On the other hand invoice discounting allows you to maintain your own relationship with the customer. This is done by allowing the business to borrow funds against sales invoices before the client has paid. Unlike factoring this is a short term loan from the finance company as it fundamentally uses the sales invoices as assurance for the loan to be allowed. This specific service gives the client more power and control over their own debts and can also help to dramatically increase cash flow.

Despite their obvious differences both factoring and invoice discounting work towards the same goal. Each are beneficial to the client as both have the capacity for releasing immediate funding within a twenty four hour period and also do not require any external assets.

However we see that the freedom associated with invoice discounting may be suited to larger companies as they are still responsible for credit control and the collection of debts and therefore are aware of when funds are coming into the business. Whereas with factoring, a smaller business may be inclined to use this service due to its “hassle free” approach as it allows you to save time and focus more on the business.

It is apparent that each of these financial solutions offers a very simple resolution to what many would deem as a costly, and time consuming problem. The differentiation of these services comes to light in two main areas, firstly in how the finance provider is used within the company. Secondly the clientele base, factoring has features which are more in tuned to the needs of smaller businesses, unlike invoice factoring which clearly favours larger companies.

Each of these services is helping to shape both new and existing businesses. In the current economic climate more and more businesses are struggling and reluctant to expose themselves to debt. These two solutions offer an alternative that businesses

desperately need. One thing is for certain, these services are set to rise within the coming years.