The Difference Between Invoice Factoring and Invoice Discounting

Factoring and invoice discounting provide a very similar service where a business can release cash that’s tied up in outstanding invoices. Although very similar, there are some key differences, mainly around confidentiality and the way the credit control process works.

Typically, invoice discounting is suited to larger businesses who are turning over £400k per annum and have at least a couple of years of trading history. Factoring is better suited for smaller businesses or even startups; however, this is not always the case.

Invoice Factoring vs Invoice Discounting: Key Takeaways

Factoring

The lender takes control of the sales ledger and collects customer payments on your behalf.

The lender is responsible for credit control.

Your customer will be aware that their invoices have been factored.

Your customer pays the factoring company directly (some factoring facilities come without credit control).

Typically used by smaller companies.

Discounting

Your business retains control over the administration of the debtor book.

You remain responsible for credit control.

Your customer will not be aware that their invoices have been discounted.

Your customer pays you as normal (through a trust account with your chosen financier).

There is no printed ‘notice of assignment’ on each invoice issued.

Typically used by larger companies with high turnover and a stable customer base.

The typical criteria for applying for invoice discounting are: over a year of trading, a turnover in excess of £400,000, and use of an accountancy package such as Sage, QuickBooks or Xero.

In short, the main two differences between factoring and discounting are that discounting is confidential and your business remains responsible for the collection of payment. Both products are perfect for businesses who are experiencing cash flow problems or are in a position where they are unsure on whether they can fulfil a potential order and grow due to the required payment terms.

What are the Differences between Invoice Factoring Vs Discounting?

In both factoring and invoice discounting, businesses monetise the unpaid invoices in their debtor book. Rather than waiting for the duration of their payment terms (e.g., 90 days), businesses receive working capital upfront. And instead of taking out and then repaying a bank loan (with interest), businesses borrow money based on the accounts receivable values due from their customers, allowing them to unlock and strengthen cash flow.

Credit control

One key difference here is that invoice factoring companies purchase your outstanding invoices outright. This means they take on the credit control duties as well, and they will deal with your customers directly. No more chasing late or unpaid invoices. No more time lost to credit checking new customers.

Invoice discounting, on the other hand, is essentially a loan secured against those unpaid invoices (rather than a sale). You remain in charge of credit control, and your relations with customers continue as before.

If you don’t want the lender contacting customers directly, but you don’t have the infrastructure in place to qualify for an invoice discounting facility, another option is CHOCCS, which stands for Client Handles Own Credit Control Services.
Confidentiality

With factoring, since you are passing credit control onto your financier, your relationship with your provider will be disclosed to your customers. If you’re wanting to keep this confidential but still take advantage of the outsourced credit control, confidential factoring is also available.

With invoice discounting, your credit control proceeds as before, so the arrangement with your lender remains undisclosed. For this reason, you’ll often see invoice discounting referred to as confidential invoice discounting, or CID.

Risk

In the case of invoice discounting, the lender takes on more risk by advancing cash based on your accounts receivable, as they have less control over whether your customers settle their invoices on time (or at all). For this reason, discounting is usually reserved for larger companies with higher turnover, a track record of collecting payments, and established, creditworthy customers.

Factoring is more often used by smaller firms, allowing them to benefit from outsourcing their credit control activities.

It’s also worth remembering that invoice factoring can be non-recourse, meaning that you won’t be liable for any instances where your customers are unable to pay. This is different to recourse factoring, where the business is obligated to buy back any unrecouped invoices from the financier.

Cost

Given the extra effort that the lender takes on in the case of factoring, invoice factoring is typically slightly more expensive than invoice discounting.

Of course, this is offset somewhat by the time freed up by outsourcing credit control operations.

Flexibility

Invoice discounting providers typically expect you to finance all your current outstanding invoices.

Factoring is more flexible if you want to pick and choose which customers or invoices you want to finance. Selective invoice finance allows you to choose specific customers to fund. Spot factoring even allows you to finance a single invoice, without committing to a long-term relationship with your funder. 

Invoice discounting vs. invoice factoring vs. invoice financing

You’ve probably come across the term invoice financing (or invoice finance) as well. Essentially, this is an umbrella term used to cover all forms of funding backed by accounts receivable. Factoring and invoice discounting are two such products – other products on the market include confidential factoring, CHOCCS, selective invoice finance and spot factoring.

Choosing the right invoice finance method for your business

Ultimately, the best invoice financing product depends on the unique circumstances of your business. This is where a broker can help.

If you feel your business would benefit from having a healthier cash flow, Compare Factoring can talk you through how the process works and line up the best suited funders who will be able to provide you with a quote. Invoice finance does come at a cost, but it gives business owners peace of mind, knowing that they have the cash available to meet critical payments such as wages. It is also common to pass this cost onto your customer.

Contact us on 01322 741425 to find out more.