Managing cash flow is one of the biggest challenges for businesses. When customers take 30–90 days to pay invoices, it can create financial strain. Two popular solutions for freeing up cash are invoice discounting and factoring. Understanding the differences will help you choose the right option for your business.
What Is Invoice Discounting?
Invoice discounting allows your business to borrow money against unpaid invoices while keeping control of your sales ledger. You submit invoices to a finance provider, who advances a percentage of the invoice value, typically 80–90%. Once your customer pays, the provider releases the remaining balance minus fees.
You remain responsible for chasing payments, which means invoice discounting is best suited to businesses with strong in-house credit control. One key advantage is confidentiality, your customers may not even know you are using finance. Fees are generally lower compared to factoring, since the provider does not handle collections.
Optional protection: With invoice discounting, you can take an option to insure your unpaid invoices against your customers’ debts becoming unpayable.
What Is Factoring?
Factoring is similar but more hands-on. With factoring, the finance provider takes over the collection process from your customers. You sell your invoices to a factoring company, receive an immediate advance, and the factor collects payment directly. The remaining balance, minus fees, is released once the invoice is paid.
Factoring reduces administrative workload and mitigates the risk of bad debt. Credit protection insurance is often included as part of factoring, providing cover if a customer fails to pay. It is particularly useful for businesses with large invoice volumes, rapid growth, or less developed credit control processes. One trade-off is that customers will know you are using a factoring service, and fees are typically higher than invoice discounting.
How to Decide
When deciding between invoice discounting and factoring, consider:
- Control and confidentiality: If maintaining relationships and managing collections in-house matters, invoice discounting is likely the better choice.
- Cash flow and administrative support: If you want predictable cash flow and help with collections, factoring may suit your business better.
- Business size and volume: Larger businesses with many invoices or those looking to scale quickly often benefit from factoring, while smaller businesses with strong credit control may prefer invoice discounting.
- Outsource credit chasing services: Save your staff valuable hours, if you don’t want to handle it in-house.
Both options can significantly improve working capital and help your business grow.
Get Expert Advice
At Causon Business Finance, we match businesses with the right funder for either invoice discounting or factoring. Our panel of lenders ensures you get the solution that best fits your cash flow needs.
