Invoice discounting/Pledging: Meaning and differences between them

Under invoice discounting some quality invoices are selected and sold to a financial institution. A proportion of the debt (invoices) is paid immediately for firm and a further payment is made once the debt has been collected.

 

The firm does not realize the full value of the invoices. Customers are not made aware of this arrangement and the firm is still responsible for the bad debt losses.

This service is less comprehensive than factoring

 

Difference between Factoring and Pledging

Factoring Pledging
1.        It involves the sale of debtors to a 3rd party known as a factor.

2.        The debtors are notified of the arrangement.

3.        Debtors are required to pay directly to the factor.

4.        The factor is responsible for the default risk (bad debt)

5.        The factor carries out the credit risk management of the debtors.

1.        It is the use of debtors as security or collateral to obtain the funds.

2.        It is a private arrangement in which debtors are not notified.

3.        The debtors pay directly to the company which sold to them on credit.

4.        The company is responsible for the default risk (bad debt)

5.        The company carries out its own credit risk management.

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