In both your business and your personal realm, operating within a set budget is a fact of life for healthy sustainability. You have to find a way to balance what you spend with what you earn so that you have the products and services you need, without paying for too much of what you don’t.
And How Does It Relate to Invoice Factoring?
So when retailers need more revenue, they may raise prices charging $4.50 instead of $4.00. You can also offer discounts on the front-end announcing “Price Reduced 20%” to get customers in the store. But this type of promotion may not work for all businesses particularly those with several large-account customers. Invoice discounting, sometimes confused for invoice factoring, is when the discount is given on the back-end. Like factoring accounts receivables, it particularly works best for companies that collect regular, large-dollar invoices.
Invoice Discounting Can Be Viewed as Factoring Receivables in Reverse
Known as the “2/10 Net 30” rule, invoice discounting means you offer a 2% discount to customers who pay the invoice within 10 days rather than the standard 30-days. Money in hand is better than money tied up in receivables. Invoice discounting can also foster strong business relationships since customers like getting a discount.
- Let’s take a look at invoice discounting in practice: Client X owes Business Z $1000, to be paid in 30 days. Business Z makes Client X an offer, “Pay me in 10-days, and I’ll give you a 2% discount.” Client X loves a good discount and quickly remits payment of $980. Business Z is content relinquishing the $20 for the fast payment and Client X is glad for the discount.
- Now let’s look at the same example using factoring accounts receivable instead: Client X owes Business Z $1000, to be paid in 30 days. Business Z doesn’t want to wait 30-days for the cash to come in so instead it reaches out to an invoice factoring company to get paid faster (within 2-3 days). The factoring company assesses the creditworthiness of Client X and decides it is reliable and pays Business Z the $980 (subtracting its 2% processing fee) and Business Z is happy to get paid right away. Client X pays the invoice factoring company within the usual 30-day billing cycle.
Two Sides of the Same Coin: Factoring Receivables and Invoice Discounting
In this way, invoice factoring or accounts receivable factoring, is viewed as the same but opposite of invoice discounting. Instead of you offering your customers a 2% discount for paying their bill early, you pay a 2-3% fee to the invoice factoring company in order to ensure you get paid sooner than the 30-day payment cycle. As part of the factoring services process, the factoring company will wait the full 30-days to get paid and the customer is none the wiser.