Invoice Discounting vs Factoring: What’s the Difference?

Understand what each of these methods of invoice finance are and how your business can choose which one is most suitable for your needs.

Updated: February 12, 2024
Matt Crabtree

Written By

Matt Crabtree

|
Rebecca Goodman

Edited By

Rebecca Goodman

 

Generally speaking, there's usually going to be a time when every business owner — whether you're in charge of a large or small company — runs into some kind of issue regarding their cash flow. This is normal and it's how you manage it that matters.

At this point, there's the choice of selling some business assets or even, as a last resort, offloading some of your employees, but this is usually a last-case scenario especially if cash flow problems are short term and mostly down to something like late invoice payments.

Instead, there are multiple loan options you can explore for a quick cash injection for your business. these loans usually don't require masses of documentation to apply for and can be paid quickly, so all of your unpaid invoice payments can then be cleared.

This is all possible thanks to invoice discounting/factoring (which both fall under the umbrella of invoice financing), but there's a crucial difference between the two that is worth getting your head around if you're interested in learning more.

In this article, we'll be breaking down each of these loan options so you can make a more informed decision as to which might be more appropriate for your business — exploring what each of these loans entails and a few tips for choosing the right one.

Invoice factoring

Put simply, invoice factoring involves selling all of your outstanding invoices to a factoring company, which then takes control over your sales ledger and is responsible for processing invoice payments from your customers.

It's a bit like outsourcing your credit control and chasing up unpaid invoices — something that can be useful no matter what industry you work in.

With factoring, your provider will generally give you a certain percentage (usually around 80-90%) of the invoice value upfront, and they'll pay the remaining balance, minus their fee, once your customer pays the invoice in full. 

Invoice discounting

On the other hand, invoice discounting means your business retains control over its sales ledger and credit control — using your invoices as collateral to secure a loan from an invoice discounting provider rather than selling them directly to a factoring company.

Your customers probably won't be aware of any kind of financing arrangement you have with your discounting provider, so the fact that your business can keep a professional appearance and full control over the credit management process is a benefit.

Still, it's probably an option that's best suited for more established businesses that have a robust credit control system in place already.

Choosing the right option

Your best option will depend on the size of your business, and how much control you want to keep of it.

We recommend invoice discounting if you're a business owner who values credit control and retaining customer relationships.

On the other hand, invoice factoring usually provides faster access to cash, and takes away the burden of chasing payments from customers.

Related Guides:

Invoice Discounting Vs Factoring: FAQs

How does invoice discounting or factoring affect my business's professional image?

Can my business benefit from both invoice factoring and invoice discounting at the same time?

Are there specific industries that benefit more from factoring or discounting?

How does invoice discounting impact the visibility of a business's financing arrangement?

Can a business continue using Its own credit control system with invoice factoring?

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