THE SUNDAY TIMES - BUSINESS DOCTOR
20 June 2010

CR writes: I would like to make use of invoice discounting or factoring to boost cash-flow. What are the advantages of one over the other? I have an artisan food business.

Collection of trade debtors is a common problem and invoice discounting or debt factoring are increasingly being utilised to expedite cash collection writes William Duggan, Audit Assistant Manager with Horwath Bastow Charleton in Limerick.

Debt factoring involves selling company debt to a third party i.e. a factoring company. The factoring company will pay you a specific percentage (approx 80% - 85%) of the debtors they take over. The factoring company takes over your debts and is responsible for collecting them, having direct contact with your company’s debtors.

Invoice discounting assigns trade debtors to the invoice discounting company. Based on the debtors assigned you can draw down cash and essentially receive upfront payment of debtors. The advantage of invoice discounting is that it is confidential. You conduct your business as you see fit. You are responsible for collecting your debts and you maintain the existing relationship with your customer.

Both facilities are subject to interest and charges. Debt factoring charges are roughly equivalent to overdraft fees. You will also be charged a fee for credit management and administration. Invoice discounting charges include an annual facility fee and a discount charge similar to an interest charge. The discount charge is levied on the funds drawn down by your company. Debt factoring fees tend to be higher than invoice discounting as both financing and credit management is provided.

Your business must sell goods on credit to other businesses in order to avail of this facility. The ageing of your company’s debtors must also be considered as it will impact on the amounts that can be drawn down. This method of financing can help you to boost cashflow in the short term however debts still need to be monitored and collected. There is also an additional administrative burden in operating either facility.