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Invoice discounting vs factoring comes down to one central question: do you want to keep collecting payment from your customers yourself, or hand that job to a lender? With invoice discounting you keep your own credit control and your facility usually stays confidential, while with invoice factoring your lender takes over collecting payment directly from your customers instead.
Both options let you release up to 90% of an unpaid invoice's value within 48 hours, so the amount you can raise and how fast it lands are similar either way. What differs is who deals with your customers day to day, how confidential the facility stays, and what it costs, which is what the rest of this guide compares in detail.
What is invoice discounting?
Invoice discounting is a type of invoice finance where you borrow against your unpaid invoices while keeping your own credit control and collections in house, so your customers keep paying you directly as normal. Your lender advances most of an invoice's value upfront, typically up to 90% within 48 hours, then releases the rest once your customer settles it in full, minus their fees.
What is invoice factoring?
Invoice factoring is a type of invoice finance where you sell your unpaid invoices to a lender, known as your factor, who advances most of their value upfront and then collects payment directly from your customers. Once your customer pays in full, your factor releases the remaining balance to you, minus their fees.
What's the main difference between invoice discounting and factoring?
The main difference between invoice discounting and factoring is who deals with your customers day to day. Invoice discounting keeps collections with your own team, while invoice factoring hands them to your lender.
Feature | Invoice discounting | Invoice factoring |
|---|---|---|
Who collects payment | You, keeping your own credit control | Your lender, directly from your customers |
Confidential from customers | Usually yes | Usually no, factoring is disclosed |
Credit control support | Stays with your business | Included as part of the facility |
Typical service charge | Around 0.2% to 0.5% of turnover | Around 0.5% to 2.5% of invoice value or turnover |
Best suited to | Businesses with an established credit control process | Businesses that want funding and credit control support together |
Both options release a similar advance rate and speed of funding, so for most businesses the decision comes down to whether you would rather keep credit control in house or hand it to your lender, which the rest of this guide breaks down factor by factor.
How do the costs compare?
Invoice discounting is usually cheaper than invoice factoring, since your service charge reflects the collections work you're still doing yourself rather than paying your lender to take it on.
Cost element | Invoice discounting | Invoice factoring |
|---|---|---|
Advance rate | Up to 90% of invoice value, some lenders advance 80% to 85% | Up to 90% of invoice value, some lenders advance 80% to 85% |
Service charge | Around 0.2% to 0.5% of turnover | Around 0.5% to 2.5% of invoice value or turnover, higher in higher risk sectors such as construction |
Discount rate | Around 1.5% to 4.5% a year over the lender's own base rate | Around 1.5% to 4.5% a year over the lender's own base rate |
A stronger business credit score and customers with a reliable payment history usually bring your service charge and discount rate down on either option, since your lender is taking on less risk.
Which is right for your business?
Weighing up invoice discounting vs factoring usually comes down to four factors: how much control you want over your customer relationships, how reliable your customers are at paying, the size of your business, and cost.
Do you want to keep control of your customer relationships?
Keeping control of your customer relationships is one of the biggest reasons businesses choose invoice discounting over factoring. Your customers continue dealing with you directly and are usually unaware a lender is involved at all, so your existing terms and rapport stay exactly as they are. With factoring, your lender contacts your customers directly to collect payment, which works well if you would rather not spend time on collections, but it does mean telling your customers in advance how the arrangement works. If chasing payment itself, rather than funding, is your real challenge, our credit control management tools can help you get paid faster without financing your invoices at all.
How reliable are your customers at paying on time?
How reliable your customers are at paying on time matters more with factoring, since your lender is taking on the job of chasing them and pricing their risk accordingly, which suits businesses with a less predictable set of payers. Invoice discounting still depends on your customers paying, but because you keep managing collections yourself, a lender assessing a discounting application puts more weight on your own track record running credit control.
Does the size of your business make a difference?
The size of your business can point you toward one option over the other, though it isn't a hard rule. Invoice factoring tends to suit smaller or younger businesses without a dedicated finance team, since the lender takes on credit control work you might not yet have the resources to run in house. Invoice discounting more commonly suits larger, more established businesses with their own finance function already in place, since eligibility usually depends on having that credit control process up and running.
Can you switch between invoice discounting and factoring later?
You could move between invoice discounting and factoring as your business changes, for example switching to factoring facility if you want to hand credit control to a lender, or moving to discounting once your own credit control function is established. A Capitalise funding specialist can talk through how a switch would work with your current lender before you commit to a new facility.
What happens if a customer doesn't pay under either option?
What happens if a customer doesn't pay depends on whether your facility is recourse or non recourse, and this choice is available on both invoice discounting and factoring. On a recourse facility your business remains liable if a customer doesn't pay, while a non recourse facility builds in bad debt protection, so your lender absorbs the loss instead, usually for a higher fee. Ask your funding specialist which basis a lender is offering before comparing quotes, since it changes the fees on either option.
Which businesses typically choose each option?
Invoice discounting tends to suit:
Invoice factoring tends to suit:
What other invoice finance options are worth knowing about?
Discounting and factoring aren't the only ways to finance your invoices. If you would rather choose which individual invoices to fund instead of financing your whole sales ledger, selective invoice finance lets you pick specific invoices or customers. If you only need to finance a single invoice as a one off, spot factoring covers a single transaction with no ongoing contract.
How does invoice discounting vs factoring compare to a business loan?
Invoice discounting and factoring both tie your funding to your sales ledger, so what you can raise grows as your invoicing does and approval leans on your customers' creditworthiness as well as your own. A business loan instead gives you a fixed lump sum to use however you need, with approval resting more heavily on your own credit profile and trading history.
Compare invoice discounting and factoring lenders with Capitalise
Whichever option fits your business, comparing invoice discounting and factoring side by side is easier with one application. Tell us about your turnover, your customers and how much you typically have outstanding on unpaid invoices, and we'll match you with lenders from our panel of UK lenders. A dedicated funding specialist talks you through the fees, the level of control you'd keep, and which facility suits how your business runs, before you commit to either one.
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