Invoice factoring vs invoice discounting: which suits your business?

The shared principle

Invoice finance lets a business borrow against its sales ledger. When you raise an invoice to a business customer, the funder advances an agreed percentage of its value, usually within a day or two. When your customer pays, the balance is released to you, less the funder's fees.

Factoring

With factoring, the funder manages your sales ledger and collects payment from your customers. It suits smaller or faster-growing businesses that do not yet have a dedicated credit control function. Your customers will normally know a funder is involved because they pay into the funder's account.

Invoice discounting

With invoice discounting, you keep control of credit control and collections. It is usually confidential, so customers continue to pay you as normal. Funders typically expect a more established business with reliable bookkeeping and a track record of collecting debts on time.

Costs to compare

Compare offers on the whole cost, not just the headline rate.

• Discount charge, the interest on funds drawn
• Service or management fee, often a percentage of turnover
• Minimum annual fees and notice periods
• Any charges for bad debt protection or audits

Which to choose

If your team spends hours chasing payments, factoring can free up time as well as cash. If you already run a tight ledger and want discretion, discounting is usually the better fit. Selective or single invoice finance is also worth considering if you only need funding against a handful of large contracts.