What is the Difference Between Bill Discounting and Invoice Discounting?

Both ‘bill discounting’ and ‘invoice factoring’ are types of financial instruments that are used to provide working capital to businesses from accounts receivables (i.e., unpaid invoices).

Providing working capital for unpaid invoices is a lifeline for both small and large businesses, but it’s important to understand the difference between ‘factoring’ and ‘discounting’. The terms are often used interchangeably, but technically you would be wrong to do so. In this article, we outline the key differences between the commonly used terms ‘bill discounting’ and ‘invoice factoring’.

What is bill discounting?

Bill discounting is a solution to unpaid invoices is to have them scheduled to be paid in the future. The process of bill discounting entails selling unpaid invoices to a financier who will then purse payment. When the company sells their unpaid invoices to a financier, they do so by offering them a discount. This is helpful when you need working capital and want to speed up your cash flow.

Some of the benefits with bill discounting include:

  • Keep cash flowing
  • Gain fast access to cash in as little as one day
  • No collateral is required
  • Bill discounting is not a loan
  • The balance sheet is not impacted

What is invoice discounting?

It is easy to confuse bill discounting and invoice discounting, but they are very different processes. This is primarily because invoice discounting uses unpaid invoices to act as collateral for a loan.

These are short term because the company can pay them back as soon as the invoice is paid. After going through invoice discounting, the company will receive a loan that is smaller than the amount of the outstanding invoices.

Similar to bill discounting, invoice discounting provides a solution for companies looking to speed up their cash flow while they wait for their customers to pay their invoices. The company financing the invoice discounting generally charges interest on the loan and a monthly fee.

Invoice discounting is typically a better fit for companies that have high profit margins that can help them cover the interest payments associated with invoice discounting. If a business has low profit margins, they may find this type of financing makes it hard for them to earn a profit.

The difference between bill and invoice discounting

Let us take a look at the difference between bill and invoice discounting. Each of these give businesses a way to get their hands on the funds they are waiting for after issuing invoices to their customers.

No matter what financing option a company pursues, they will want to make sure they shop around to see which financing companies can offer them the lowest interest rates and fees. This is an important step that can help save businesses a lot of money.

The Bottom Line

Whether you go for Bill Discounting or an Invoice Discounting, it will depend on the business size. It will also depend on your sales ledger management capitals.

If you run a small-scale business and your human resources are limited, go for Invoice Factoring. The credit control and collection service that originates with Invoice Factoring is probable to outfit you better.

If you run a large-scale business, and you own the large human resources then Invoice Discounting suits you better. If you manage information resources to professionally manage your sales record and debt collection, then use this. Invoice Discounting is also used if you want your own business to contract with debt.