Factoring and bill discounting offer sellers and traders the facility to collect their receivables faster without having to have capital tied up. Since the use of factoring and bill discounting help to improve cash flow, these sources of short-term finance are quite popular among traders and are used greatly in international trade. Despite their similarities, there are a number of subtle differences between factoring and bill discounting. The article that follows offers a clear explanation on each and highlights their similarities and differences. What is Factoring? In factoring receivables, the trader sells their unpaid invoices to factoring companies such as banks and financial institutions at a discounted rate.
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Factoring and bill discounting offer sellers and traders the facility to collect their receivables faster without having to have capital tied up. Since the use of factoring and bill discounting help to improve cash flow, these sources of short-term finance are quite popular among traders and are used greatly in international trade. Despite their similarities, there are a number of subtle differences between factoring and bill discounting. The article that follows offers a clear explanation on each and highlights their similarities and differences.
What is Factoring? In factoring receivables, the trader sells their unpaid invoices to factoring companies such as banks and financial institutions at a discounted rate. Then these factoring companies immediately pay the trader the value of their invoices minus a fee.
This is very convenient to the seller as he is not only able to recover his receivables faster , but factoring also improves cash flow by releasing funds which would be tied up for an indefinite period. In the process of factoring receivables, factoring companies are also responsible for maintaining all credit control activities including management of the sales ledger and collecting debts directly by contacting customers.
Recourse factoring is beneficial to factoring companies, as in the event that the customers do not pay their bill amount to the factor within 60 to days the trader is required to buy back those invoices and has to suffer the loss of non-payment. In non-recourse factoring, the risk and loss of non-payment are borne completely by the factoring company. Freight factoring services are also used to receive payment on freight bills. The freight handling firm can sell their bill of lading or freight bill to the factoring company and receive cash immediately.
What is Bill Discounting? In bill discounting, the seller of goods draws up a bill of exchange on the buyer of the goods and then discounts the said bill of exchange with a bank or financial company. The seller is able to get immediate finance minus the fee charged by the finance firm. Bill discounting lets the seller recover their receivables faster thereby improving cash flow. Before purchasing the bill, the bank or financial institution has to consider a number of factors including the risk of non-payment associated with the bill and the amount of time remaining for the bill to become due.
A bill with lower risk and shorter duration of becoming due is preferred. Once the buyer of the goods makes the payment to the bank the transaction is settled. What is the difference between Factoring and Bill Discounting? Factoring and bill discounting are both sources of short term finance which offer traders and sellers an avenue to obtain payment for receivables in a fast and convenient manner.
Both forms of short term financing help improve cash flow and working capital management. Despite their similarities, there are a few differences between factoring and bill discounting. Bill discounting is always recourse, whereas factoring may be recourse or non-recourse. Factoring also maintains sales ledgers and collect debt, while bill discounting only involves the purchase of the bill and no sales ledger maintenance is carried out by the finance company.
It is possible for a bill to be discounted a number of times before maturity. However, this is not the case for factoring. Factoring is a facility that can be extended over a number of invoices, whereas in bill discounting each bill is assessed individually before being discounted.
Difference Between Bill Discounting and Factoring
Differences between Factoring and Bill Discounting Differences between Factoring and Bill Discounting Differences between Factoring and Bill Discounting Though Factoring and bill discounting helps clients in different ways, there are certain difference between them as discussed here. This may be with or without recourse seller factoring. In Bill Discounting all the bills are with recourse to the i. Rights to give notice in Factoring vs Bill discounting: In factoring a factor always reserves the right to give notice and right to collect the money. The right to collect the money is given to the factor by the client.
Difference between factoring and forfaiting
Thus, by virtually eliminating the risk of nonpayment by foreign buyers, factoring allows the exporter to offer open accounts, improves liquidity position, and boosts competitiveness in the global marketplace. Forfeiting: A forfaiter is a specialized finance firm or a department in banks offers non-recourse export financing through the purchase of medium-term trade receivables. Similar to factoring, forfaiting virtually eliminates the risk of nonpayment, once the goods have been delivered to the foreign buyer in accordance with the terms of sale. However, unlike factors, forfaiters typically work with the exporter who sells capital goods, commodities, or large projects and needs to offer periods of credit from days to up to seven years. Bills Discounting: Business activities across borders are done through letter of credit. Letter of credit is an instrument issued in the favor of the seller by the buyer bank assuring that payment will be made after certain timer frame depending upon the terms and conditions agreed, it could be either sight, 30 days from the Bill of Lading or days from the date of bill of lading. Now when the seller receives the letter of credit through bank, seller prepares documents and presents the same to the bank.
Difference Between Bill Discounting and Factoring (With Table)
Bill discounting includes parties like payee, drawee, and drawer whereas factoring involves client, debtor, and factor. Bill discounting or invoice discounting and factoring both help entrepreneurs to use short term credit. When a businessman takes a decision for factoring or account receivable financing, he needs to sell the account receivables or due invoices to factor. On both short term and long-term basis companies need funds. If one wants to achieve short-term requirements, companies tend to follow the ways of bill discounting and factoring. In bill discounting, one can have complete control of your business because you are responsible for administrating your sales ledger.
Difference Between Factoring and Bill Discounting