If your business regularly issues invoices, you’ll know the frustration of waiting 30, 60, or even 90 days to get paid. In the meantime, wages need paying, stock needs ordering, and opportunities don’t wait. Invoice finance exists to solve exactly this problem, but with two main products on the market, invoice factoring and invoice discounting, it’s important to understand which one suits your business before you commit
In this guide, we’ll walk you through invoice factoring vs invoice discounting, its key differences, and how to decide which is the right fit for you and your business’s cash flow.
What is Invoice Factoring?
Factoring is an invoice finance product where the borrower sells their invoices to the factoring lender in exchange for upfront cash. With factoring, the finance company makes between 70% and 90% of the invoice value available. With factoring, a business can keep the credit control in-house, or it can request that the lender get involved. If the lender were to get involved, they tend to be involved in managing the sales ledger and credit control.
Compared to invoice discounting, the lender is much more involved with the business in invoice factoring; they will ‘mirror the ledger’. The borrower will need to re-divert customer payments to the lender’s trust account and introduce a credit collection agent at the lender’s office, who will collect the debt on your behalf.
Security required depends on the lender, but most likely lenders will need an all assets debenture, plus there is likely to also be some sort of guarantee, either a personal guarantee or a form of anti-fraud indemnity.
What is Invoice Discounting?
Invoice discounting is an invoice finance product that allows you to borrow funds against your entire sales ledger. Usually, a business will be able to borrow up to 90% of the outstanding invoice value. Invoice discounting does not include credit control as part of the service. As such, the most common form of invoice discounting is Confidential Invoice Discounting (CID), which is where the funder sits behind, and funds against the sales ledger confidentially from the end debtor. Invoice discounting facilities can also have the lender disclosed to the end debtor, although mainly this happens in cases where the business is liable to disputes or claw-backs.
With all forms of invoice discounting, the borrower will need to re-divert customer payments to the lender’s trust account (in the borrower’s name). Unlike factoring, where the lender gets involved in collections, the customers and clients just keep paying as normal and in CID, do not know the lender is involved.
Invoice Factoring vs Invoice Discounting: Key Differences
| Invoice Factoring | Invoice Discounting | |
| Structure | Sale of invoices | Loan secured against invoices |
| Credit control | Managed by the factoring company | Retained by your business |
| Customer awareness | Customers pay the factoring company directly after it has been made clear that the invoice has been handed to an IF lender | Confidential (customers are unaware) |
| Bad debt protection | Available via non-recourse agreements | Not typically available |
| Best suited to | SMEs without dedicated credit control, turnover plays a part too | Businesses with strong credit control |
Which is Right for Your Business?
The decision is based on the size, structure, and needs of your business. Invoice factoring suits smaller businesses or businesses that don’t have a dedicated credit control or accounts receivable function. Factoring not only offers breathing room but also peace of mind.
When considering invoice discounting, this is often suited better for larger, more established businesses with robust internal processes. Invoice discounting works well for businesses that have a finance team that handles collections, value the confidentiality of their funding arrangements, and need a flexible line of credit to smooth out cash flow without bringing in a third party.
The Bottom Line
Choosing between invoice factoring vs invoice discounting will determine whether a business can effectively manage cash flow. The right choice has to be based on control, confidentiality, and how much support a business will need throughout the collections process.
At Funding Bay, we help businesses find the right invoice finance solution for their specific circumstances. Whether you’re exploring factoring, discounting, or simply want to understand your options, our team is here to help. Get in touch with us today or try our invoice finance calculator to get an instant indication of how much funding you could access.
