As a business owner, it's not uncommon to experience cash flow issues. One way to address this challenge is through invoice financing. Invoice financing is a form of short-term borrowing that allows you to sell your invoices to a third party for a fee. This process allows you to receive immediate payment for your invoices, which can help improve your cash flow.
Two popular types of invoice financing are purchase invoice discounting and sales invoice discounting. While they both involve the same process of selling invoices, there are key differences between the two that you should be aware of before deciding which option is best for your business.
Purchase Invoice Discounting
Purchase invoice discounting, also known as supplier finance, is a financing option that allows businesses to borrow against their purchase invoices. This means that a business can sell their invoices to a third-party lender in exchange for immediate cash, rather than waiting for the customer to pay the invoice.
The third-party lender will typically provide a percentage of the invoice value upfront, usually between 70-90%, and will then collect the full amount owed from the customer when the invoice is due. Once the customer has paid the invoice in full, the third-party lender will release the remaining percentage of the invoice value to the business, minus a fee for the financing.
One of the main advantages of purchase invoice discounting is that it provides immediate cash flow to the business, which can be especially helpful for businesses with long payment terms. This can help businesses maintain their cash flow and avoid late payment fees.
Sales Invoice Discounting
Sales invoice discounting, also known as debtor finance, is another financing option that allows businesses to borrow against their sales invoices. However, unlike purchase invoice discounting, sales invoice discounting allows businesses to maintain control over their debtor ledger, meaning that they are responsible for collecting payment from customers.
Similar to purchase invoice discounting, a business can sell their invoices to a third-party lender in exchange for immediate cash, usually between 70-90% of the invoice value. The business will then collect payment from the customer when the invoice is due and will repay the third-party lender, along with a fee for the financing.
One of the main advantages of sales invoice discounting is that it allows businesses to maintain control over their customer relationships and the collections process. This can be especially important for businesses that value their customer relationships and want to maintain control over the collections process.
Key Differences
While both purchase invoice discounting and sales invoice discounting allow businesses to receive immediate cash for their invoices, there are key differences between the two. The main difference is who is responsible for collecting payment from the customer.
In purchase invoice discounting, the third-party lender is responsible for collecting payment from the customer. In sales invoice discounting, the business is responsible for collecting payment from the customer. This means that businesses that value their customer relationships may prefer sales invoice discounting, as it allows them to maintain control over the collections process.
Another difference between the two options is the cost. Purchase invoice discounting tends to be more expensive than sales invoice discounting because the third-party lender is taking on more risk. This is because in purchase invoice discounting, the third-party lender is responsible for collecting payment from the customer. In sales invoice discounting, the business is responsible for collecting payment from the customer, which reduces the risk for the third-party lender.