A lot of people are confused about the difference between these two forms of financing.
It is however very simple:
both systems use the cash tied up in unpaid invoices as the base for providing you with cash. (up to 80% of the value of the invoices). However the difference is that with:
Invoice Discounting: the invoices are still yours and the value of them is used as collateral.
Factoring: you sell the invoices to a company and the factor owns them (and the debt).
The consequences of this difference play especially with bankrupcy:
- with factoring, should you go bankrupt the factor still can reclaim his money from your client as the client has now a debt to the factor and not to you. (as the factor is the legal owner / new emittor of your invoices.
- with invoice discounting the debt is owned by the liquidator who handles your bankrupcy and the factor will get his money after the preferred debtors.
Tags: factor, factoring, invoice discounting, invoices
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