Not many are familiar with the differences between these two invoice discounting products. But in today's article, we aim to explain the critical differences between them so you know which would suit your business's needs best when looking for a cashflow solution.
A quick recap of what Invoice Discounting is
Invoice discounting is a financial practice where businesses utilise their unpaid invoices to secure immediate working capital from a financing provider. By agreeing, businesses receive a percentage of the invoice value as an advance, aiding cash flow needs. Unlike invoice factoring, the business maintains control over its collections process and customer interactions. As customers settle their invoices, the collected funds are used to repay the advance, with fees and interest deducted by the financing provider. This discrete form of financing is especially beneficial for businesses seeking to bolster their liquidity while retaining autonomy over customer relationships.
Now that we’ve revised what invoice discounting entails let’s chat about the two variations…
Undisclosed Invoice Discounting
Also known as “confidential invoice discounting”, the customers of the business are not informed about the financing provider's involvement. From the customers' perspective, they continue to interact solely with the business as they normally would for payments. The business handles the collections process without revealing that it has used its invoices to obtain financing.
Disclosed Invoice Discounting
Now here, the customers of the business are aware of the financing provider's involvement in the transaction. This means that the customers are informed that the business has used its outstanding invoices to secure financing from a third-party provider. The financing provider's name and contact information might be included on the invoice or in communications related to payment.
Now here are a few advantages when using disclosed discounting:
- Credibility
Openly partnering with a financing provider enhances the business's credibility by showcasing its commitment to financial stability and growth.
- Potential for Collaboration
With disclosed discounting, the financing provider might offer additional services or support, such as credit analysis, which can aid the business in making informed credit decisions.
- Transparency with Customers
Disclosing the financing arrangement to customers establishes transparency, which can strengthen customer trust and communication. Customers are aware that the business is taking steps to manage its cash flow efficiently.
- Clear Payment Instructions
Since customers are aware of the financing arrangement, there's less potential for confusion or misunderstandings about payment instructions and terms.
At the end of the day, it comes down to each business deciding which one they prefer when applying for invoice discounting. We at DiscountDesk often prefer disclosed as the benefits for us as the financier, the business and the customer outweigh those from undisclosed.
If you would like to find out more regarding invoice discounting or have any cash flow-related questions for your business, you are more than welcome to get in touch with us.