Education

Which should I choose: invoice factoring or invoice discounting?

27 Sept 2022

Waiting weeks or even months for invoices to be paid can put pressure on any business’s cash flow. But invoice factoring and discounting can ease the burden. Both invoice factoring and discounting enable businesses to unlock the cash tied up in their unpaid invoices. Factoring and discounting are types of invoice finance, and there are some key differences. So, which one is most suitable for your needs?

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Before we dive into the differences between invoice factoring and discounting, let’s take a look at what invoice finance means. Invoice factoring and discounting both fall under the ‘invoice finance’ umbrella, and it can be helpful to understand this first.

Broadly speaking, an invoice finance provider will advance you most of the value of your invoices (e.g. 75%) almost immediately, so you don’t have to wait to get paid. The percentage you are eligible to receive will depend on the risk factor. 

Essentially, you’re selling your invoices to a finance provider in return for a fee. 

How invoice finance works

  • You invoice your customer/client 

  • You give the invoice details to the finance provider

  • A percentage of the invoice is paid to you, typically within two days

  • Either you chase the outstanding invoices or the finance provider does it for you

  • When your customers/clients pays, the rest of the value of the invoice is paid to you, minus the finance provider’s service fee 

Who uses invoice finance?

Invoice finance is designed for businesses that invoice customers/clients upon completion of a job. A wide variety of sectors use it, from construction and transport to printing and professional services. 

Startups and growing business owners can use invoice finance to inject cash into their business as soon as they've earned it. It can also benefit companies that require a cash flow boost and can’t afford to wait a long time for their payments to come through. 

Invoice discounting and factoring differences

The main ways factoring and discounting differ has to do with who controls the sales ledger, and who’s responsible for collecting payments and chasing unpaid invoices.

Invoice factoring 

With invoice factoring, the finance provider is responsible for managing your sales ledger and chasing up unpaid invoices. Because your customers/clients will be dealing with the finance provider, they’ll probably know that you’re using invoice factoring. 

Advantages

  • The finance provider takes care of your sales ledger and credit control, enabling you to focus your efforts on other areas of the business. 

  • The lender focuses more on your custmomers' payment history than your credentials, which can make it more accessible than a traditional bank loan.

Disadvantages

  • Your customers/clients might want to deal with you directly.

  • You will have to pay for the additional sales ledger and credit control service. 

Invoice discounting

If you opt for invoice discounting you’ll remain in control of your sales ledger, etc., and continue to chase your own unpaid invoices. 

Like factoring, customers will pay their invoice into an account managed by the finance provider, however it will have your business’ name on it so they will probably be none the wiser that you’re using invoice discounting. 

Advantages

  • Invoice discounting is cheaper than invoice factoring, and it’s more confidential. 

  • You retain control of everything, which could be beneficial when it comes to maintaining a relationship with your customers/clients. 

Disadvantages

  • Invoice discounting is usually only available to more established businesses with a robust credit collection process and a higher turnover (more than £100,000). 

  • You'll still have to do your own credit control to ensure customers pay on time.

Should I choose invoice factoring or discounting?

The type of invoice finance you opt for will very much depend on your business’ size, resources and circumstances. Invoice factoring might be more suitable if you run a smaller business with fewer credit control and debt collection resources. 

On the other hand, if you run a bigger business and are able to deal with your own sales ledger and credit control, you might want to go down the discounting route. The same applies for if you’d much prefer to chase down your own customer invoices. 

Don’t forget about selective invoice finance and spot factoring!

Before you go, did you know that there are two other forms of invoice finance?

Selective invoice finance lets you borrow against specific customer accounts, while spot factoring lets you choose specific invoices to finance.  

Unlike invoice factoring and discounting, neither are full facility products, meaning you can decide which invoices you’d like to finance instead of financing all of them.  

Selective invoice finance and spot factoring can suit businesses with a good idea of how much cash they need, but can be more difficult to secure than factoring/ discounting. 

Whatever facility you choose, Funding Options is here to help. 

We match our customers with the industry’s largest lender network, which includes a variety of invoice finance providers. Tell us how much you need to borrow, what it's for and provide some information about your business to receive an instant comparison.

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Editorial Team

Editorial Team

Invoice Finance

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