Invoice Factoring Or Invoice Discounting - Which One Is Better?

Unpaid invoices are a setback when it comes to the financial status of your business. It makes your cash tied up and affects the cash flow of your business. Your customers are valuable and you don’t want a harsh approach when it comes to handling the invoices. But, sometimes you run out of time to wait for your customers to pay off their invoices.

Here is how you can finance your unpaid invoices and be more efficient at the collection end using receivable financing.

Invoice Factoring Or Invoice Discounting - Which One Is Better?

Invoice Factoring and Invoice Discounting

There are two ways you can finance your unpaid invoices through receivable financing. These financing services are known as Invoice financing and Invoice Discounting.

Both methods have a similar approach in funding your business with the invoice with a slight difference at the collection end. Invoice factoring lets the factor or factoring company handle your collection. Whereas in Invoice discounting, you are in charge of the collection end and directly receive the invoice amount from your customers. Thus, the major difference comes with confidentiality.

Invoice factoring is the most widely used method when it comes to getting funds using unpaid invoices. In the previous blog posts, we have discussed what Invoice factoring is and its advantages.

Invoice Factoring

You can finance your unpaid invoices using invoice factoring. Invoice factoring lets you have 80% of the invoiced amount upfront. You can use this amount for your business growth and allow the collection process to be handled by the factoring company. This will not only take away the hassle of running behind the invoice collection but also will avail enough time to grow your business.

The steps for invoice factoring or receivable financing is easy, simple and online. You need to sign up for an account, integrate your accounting software with it, and you are ready to use factoring facilities.

Handling unpaid invoices is not an easy task especially when you know that your assets have not reached your hands. The collection process can stress you out depending on the quality of your customers. Financing your invoices is definitely one of the best ways to have that tension go away. 

Even though you are not directly collecting the invoices from your customers, you need to make sure your customers are paying the factoring company on time. Therefore, follow these tips to manage invoices effectively through receivable financing:

Tip #1: Stick To Your Procedure

Make Sure You Have A Clear And Fixed Procedure. Don’t just contact your customers for the payment every time you feel its past due. 

  1. Have a clear system and procedures with a fixed time schedule for the payment.
  2. Make sure you have invoiced to the correct address, clear about the amount and other details. Refer to our blog post on the common mistakes made when invoicing a customer. 
  3. Make sure you are accurate on sending the right invoice to the right person with the right amount. 
  4. Make sure you have mentioned a clear and fixed time duration for the payment.
  5. Instead of jumping into conclusions, try to understand the situation of the customer. Check with them if they are available, in a difficult situation or the reason why they are late for the payments. 
  6. Make sure your emails and communication channels are reaching the customer. It is very normal for your customer to miss your email if it goes to the spam or any other junk email folder. Therefore, Make sure they have received the invoice and the follow-up emails.

These steps will also help you have a long-standing relationship with your customers and not lose them in terms of payments.

Tip #2: Set Offers

Setting a discount on early payment of the total invoice may attract your customers into paying sooner. Let’s say, for example, set a small percent of discount on the invoiced amount if the customer is paying within 10 days or a week. This might encourage the customer to pay early and get a reduced price. But, this doesn’t work every time. Not everyone is motivated by discounts to pay early.

However, nobody wants to have a penalty paid for being late. Thus, keeping a penalty may work better than the discounts offered. Essentially, your cash is being tied up in unpaid invoice and charging a small interest or fee after the due date can be justified and may encourage the customer to pay on time.

Tip #3: Have Flexible Business Terms And Conditions

Have some flexibility with your customers when it comes to payment terms and conditions. If you are to keep a long term relationship with them, then try being polite with the emails and follow up procedures for the invoice payments. Sending a harsh email explaining your frustration for not getting the payments on time may hurt the business relation. Instead, enquire the reason for the late payments.

Set flexible terms and conditions when it comes to payment schedules that will suit both parties. Also, make sure you are giving multiple payment methods for your customers. Not everyone uses the same payment outlets. Having different payment channels like online transactions, mobile app-based payment systems makes it easier and convenient.

Tip #4: Taking It Legal

When nothing else works out, and it is past overdue, it’s time to take things legally. If your payment is due more than 90 days and you are sure the payment is not going to be made by the customer, then it is time to face things legally. It may cause a fee to stand up for the case but at the end, it’ll be worth you can get the invoices paid.

Receivable Financing, Is It?

We can conclude by saying you must finance your invoices through receivable financing. It is the easiest and fastest way to get funds for your business and not worry about the time gap of your customer payments.

Finaxar lets you finance your unpaid invoices with an upfront payment. The application procedure includes three steps – Sign up, integrate your accounting software and verification. After your application is approved, within 72 hours, you can get your fund credited to your account. You can focus on growing your business without waiting for your customers to pay and knowing that your collection end is handled professionally.