If your business invoices other businesses and offers payment terms (such as 30, 60, or 90 days), you have likely experienced the cash flow gap that occurs while waiting to get paid. Invoice finance solves this by advancing the majority of the invoice value immediately.
However, there are two primary ways to access this funding: Invoice Factoring and Invoice Discounting. In this guide, we break down how both work, how they differ, and which method is most appropriate for your business model.
What is Invoice Factoring?
Invoice factoring is a comprehensive cash flow solution where a finance provider not only advances funds against your invoices but also takes over your credit control processes.
- How it works: You sell your outstanding invoices to the factoring company. They advance you up to 90% of the value immediately.
- Credit control: The factoring provider chases your customers for payment on your behalf.
- Visibility: It is generally a disclosed facility, meaning your customers will know you are using a factoring provider and will pay the provider directly.
What is Invoice Discounting?
Invoice discounting provides the same cash flow benefits as factoring, but you retain full control of your sales ledger and your relationships with your customers.
- How it works: You still receive a cash advance against your invoices (usually up to 90%).
- Credit control: You are strictly responsible for chasing and collecting payments from your customers.
- Visibility: It is usually a completely confidential facility. Your customers pay into a trust account in your name, meaning they never need to know a lender is involved.
Key Differences Decoded
1. Confidentiality
Factoring is disclosed; discounting is confidential. If keeping your financial arrangements private is crucial to your brand image, discounting is the better choice.
2. Resource Requirements
Because discounting requires you to collect your own payments, you must have internal credit control resources. Factoring is ideal for leaner businesses that want to outsource this administrative burden.
3. Cost Profile
Because factoring includes a credit control service, the service fees are generally slightly higher than those associated with discounting.
Key Takeaways
- Factoring includes credit control; Discounting leaves you in charge of collections.
- Factoring is visible to customers; Discounting is strictly confidential.
- Discounting typically requires a higher annual turnover and proven accounting processes to qualify.
- Both solutions release up to 90% of your invoice value within 24 hours.
Frequently Asked Questions
Which one is cheaper?
Generally, invoice discounting carries slightly lower service fees because the lender is not managing your sales ledger or chasing payments.
What if my customer refuses to pay?
If the facility is 'with recourse', you remain liable to repay the advance. If you opt for 'non-recourse' finance (available for both types), the provider absorbs the debt if the customer goes insolvent.
Release Cash Tied Up in Your Unpaid Invoices
Speak to our team today to find out whether factoring or discounting is right for your cash flow needs.
Related Articles
More Guides Coming Soon
Check back for more business finance guides and tips.
Lending Rate Impact
Estimated -0.85% to -1.2% reduction in lender risk premium via Goodlady Sentinel Audit evidence.
Borrowing Access
14.2% increase in institutional lender appetite for audited portfolios.
Goodlady Sentinel Node Changelog
Institutional Investor (Global)
"Deep technical evidence here on the regional liquidity gap. Essential reading for our Q2 allocations."
Regional Business Director (London)
"The LSEG listing benchmarking is particularly useful for our upcoming Series B."
Community Audit Access Locked
To post comments or participate in the regional audit discussion, you must verify your identity via the Goodlady Sentinel Node.
Sign Up / Verify Identity