Invoice discounting, also known as invoice factoring, can be incredibly useful to businesses of all sizes and stages of growth. This article will walk you through the different types of invoice discounting, helping you figure out which one will be the best fit for your company’s current needs.
1) Purchase Order Factoring
In purchase order (PO) factoring, a company sells its unpaid invoices—basically selling its right to be paid by a client—to a third party. Factoring companies then collect payment on those invoices from clients directly or use their own accounts receivable (A/R) department to do so.
Purchase order factoring is useful for businesses that regularly sell goods and services on credit and need help managing cash flow while they wait for payments. It’s also good for business owners who want to free up working capital but don’t want to incur debt or interest expenses associated with traditional loans. It’s important to note that PO factoring isn’t free: A factor will take a percentage of each invoice as an administrative fee.
2) Trade Credit Advanced Funding
If you’re looking for capital in order to build out a new product or service line, Trade Credit Advanced Funding (TCAF) is a financing solution that can give you access to affordable funding by factoring your invoices. TCAF is beneficial for businesses with established credit histories and steady cash flow, but there are other types of invoice discounting available for companies without perfect credit. Read on for more information about invoice factoring and what it can do for your business.
One popular alternative to trade credit advanced funding is invoice factoring. With invoice factoring, an investor purchases your outstanding invoices at a discounted rate—usually between 80% and 95% of their value—and then gets paid back once customers pay off those invoices. This allows you to boost sales growth while getting immediate access to working capital from investors when short-term finances are tight.
3) Accounts Receivable Factoring
Accounts receivable factoring is a type of invoice discounting that’s great for businesses looking to raise cash quickly. This method allows you to turn your unpaid invoices into revenue, while also lowering your total out-of-pocket costs. When compared with invoice financing, accounts receivable factoring is a great choice because it doesn’t require a set repayment schedule. Instead, you can choose how long to hold onto an invoice before collecting payment. Factoring can be used as a tool to help grow your business and improve cash flow, but there are some drawbacks—including potential tax implications—so make sure you know what you’re getting into before committing.
Conclusion
In today’s fast-paced business world, it’s important for small businesses to work smarter and not harder. By taking a closer look at invoice discounting and factoring—and how they can be used in your company’s bottom line—you can improve cash flow and overall financial health.
Invoice discounting allows you to receive payments before invoicing customers, while factoring allows you to sell invoices for immediate cash. Both methods are great ways to boost profits; however, each has its own advantages and disadvantages that should be carefully considered before deciding which method is best for your business.
