Question 6.RQ.4: Distinguish between invoice discounting and debt factoring.

Invoice discounting is a service offered to businesses whereby a financial institution is pre-pared to advance a sum up to 80 per cent of outstanding trade receivables. The amount advanced is usually payable within 60 to 90 days. The business will retain responsibility for collecting the amounts owing from customers and the advance must be repaid irrespective of whether the receivables have been collected. Factoring is a service whereby a financial institution (factor) takes over the sales and trade receivables records and will undertake to collect trade receivables on behalf of the client business. The factor will also be prepared to make an advance of 80 per cent (or perhaps more) of approved trade receivables, which is repayable from the amounts received from customers. The service charge for invoice dis-counting is up to 0.5% of sales revenue, whereas the service charge for factoring is up to 3% of sales revenue. This difference explains, in part, why businesses have shown a preference for invoice discounting rather than factoring in recent years. However, the factor provides additional services, as explained.