Factoring vs invoice discounting – managing cashflow

invoice finance factoring

Keeping a grip on cashflow can be the difference between thriving and surviving for a small business. While having a supportive bank can help bridge the cashflow gap, another type of small business finance definitely worth considering is invoice financing. This is the collective term for factoring and invoice discounting, two services which facilitate the release of cash against monies earned but not yet paid for.

So how does factoring and invoice discounting work in practice, how do the two differ, and which one is more suitable for your business?

Two types of financial service

Both factoring and invoice discounting release funds that are tied up in outstanding invoices and both are facilitated by a provider who advances you a pre-agreed percentage of the money owed – up to 90% of the total – and charges a credit management fee and/or interest for their services. Where the two services differ essentially is in who manages your sales ledger and takes responsibility for collecting the money you are owed.


Factoring means the provider will assume a credit control function on your behalf to help manage the company sales ledger and chase up customers to settle outstanding invoices for goods or services you have provided. With factoring, your customers pay the provider instead of your business. Clearly, this involves an element of confidentiality as your customers will be aware that you are using a factoring service. Whether or not this is an issue is something you’ll have to take into account before going ahead.

Invoice discounting

With invoice discounting you retain control of your company’s sales ledger and are responsible for chasing up payment, including late payments, in the usual way. Customers will continue to pay you directly and will not be aware that a third party is involved and perhaps gain the impression that your business is having a problem with cashflow. This may be more of an issue for you if you have a close business relationship with your clients.

Some benefits of factoring and invoice discounting

Getting a quote for factoring or invoice discounting is pretty straightforward and can be done online. You’ll have to give a few details about your type of business and annual turnover. Depending on which finance option you go for, you could receive up to 90% of the amount outstanding on your invoices. Typically, funds can be released within 24 hours and without having to put up any other assets as security.

Other benefits include:

  • Cash is available to help grow the business and overcome problems with cashflow.
  • As your turnover increases so does your ability to leverage funding in this way.
  • With factoring, you don’t have to spend time or energy chasing up customers for money.
  • With invoice discounting, you retain control of your sales ledger while quickly releasing money you’re owed.
  • Both options mean you can bridge the gap between sending out invoices and waiting to get paid.
  • Boost your company reputation by being able to pay your own bills promptly.

Who uses this type of finance arrangement?

Any business which provides goods or services to customers and offers 30 to 90 days credit terms can use factoring or invoice discounting to help solve cashflow problems caused by slow payment. This includes business involved in construction, recruitment, printing, manufacturing, as well as wholesale supply, IT consultancy, and freelancing.

Is it right for you?

If you have the human resources available and want to keep credit control in-house, invoice discounting is likely to be you’re preferred option. On the other hand, if you’re happy for someone else to chase up invoice payments, while freeing you to get on with growing your business, factoring may be more suitable.

Shop around for the best deal

As always, it pays to shop around and get a few quotes before deciding which provider to use for factoring or invoice discounting. The latter is the cheaper of the two because there is less work involved for the provider and the fee will usually be in the form of interest charges. Costs for factoring include credit management fees based on your turnover, volume of invoices and the number of customers you have. A credit protection charge may also be applicable.

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