The Difference Between Factoring And Invoice Discounting

In A Procedural Way . . . . . .

The difference lies in the contract between a Supplier of goods and services and his Financier:

Explanatory Notes:

Factoring

The invoices are ‘taken on’ (uploaded) onto the Financiers Accounting System. In the old days this was done manually – today the procedure is digitally automated.

The Financier usually pays out 75 or 80% of the value of a Debtors Ledger, after ‘withholding’ (not exposing himself) certain invoices.

The Supplier usually Retains 25 or 30% of the ledger as a measure of safety. This amount is returned to the Supplier as the transactions are paid and closed.

The Financier manages the Debtors Ledger on behalf of the Financier, taking into discounts allowed. Credit Notes therefore also need to be offered to the Supplier.

The Financier sends out the monthly Statements to Buyers (Debtors) on behalf of the Supplier, that carry an instruction that ALL payments have to be made to him, the Financier, NOT to the Supplier.

Invoice Discounting

The Supplier selects the invoices he would like to discount (sell).

The Financier considers the offer, that he can insure if he wants to, then buys it, in terms of the Contract.

Pays up to 75 or 80% up front to the Supplier, retaining 25 or 30% as a safety precaution.

The Retention amount gets paid back to the Supplier at the conclusion of the transaction, when the Buyer pays.

The Financier notifies the Buyer to the effect that he has purchased the invoice and that payment must be made to him the Financier and NOT to the Supplier.

In Both Cases

As invoices are factored or discounted an immediate Contingent Liability occurs to the Supplier IF the invoices are sold ‘With Recourse’ to the Supplier, and a note to this effect needs to be appended to Final Annual Audited Accounts of the Supplier.

If the invoices are bought ‘Without Recourse’ to the Supplier then note in the Final Annual Accounts can be dispensed with.

Roger Herbert