Invoice factoring vs invoice discounting

Invoice factoring is a financing arrangement where a business sells its unpaid customer invoices (accounts receivable) to a factoring company (also called a “factor”). The factor pays you most of the invoice value upfront—commonly 70% to 90%—and then takes over the responsibility of collecting payment from your customers. Once the end customer pays, the factor remits the remaining balance to you (minus fees).

Key points about factoring:

• The factoring provider typically handles credit control and collections.

• It can be beneficial for businesses that lack internal resources to chase payments.

• Your customers become aware that a factoring company is involved, because the factoring company issues invoices and collects payments on your behalf.

Invoice discounting is another form of receivables financing, but here your unpaid invoices are used as collateral for a loan. Instead of selling the invoices outright, you receive an advance (again, often 70% to 90% of the invoice value) from the discounting provider. You then retain the responsibility for collecting payments from your customers and repaying the loan as invoices are settled.

Key points about discounting:

• You maintain control of credit management and collections.

• Often more discreet—customers typically won’t know you’re using a discounting facility.

• Fees tend to be slightly lower for established businesses with strong credit systems.

In both factoring and discounting arrangements, you’ll usually pay a service fee plus interest (or a discount charge) on the amounts advanced. The cost can vary based on:

• The size of your sales ledger (or invoice values).

• Your customers’ creditworthiness.

• The specific terms of the factoring or discounting provider.

Generally, invoice discounting can be less expensive than factoring if you already have strong credit control processes in place—since the provider does not have to manage collections. However, smaller or newer businesses might find factoring more beneficial because it can include credit management support.

• Factoring

  is popular with smaller or rapidly growing businesses that may not have robust internal processes or the bandwidth to collect and chase invoices.

• Discounting

  often appeals to larger, more established firms that prefer to keep their financing arrangements private and have efficient internal credit control systems.

• Factoring: Your customers deal directly with the factoring provider (for payment and communication), which means they will be aware you are factoring your invoices. Some businesses prefer this arrangement because it offloads the administrative task of chasing payments. Others worry it may affect the customer’s perception of their creditworthiness.

• Discounting: Because you continue collecting payments directly from customers, they may never know you use an invoice finance facility. This keeps your relationships private and direct.

Invoice finance (whether factoring or discounting) in the UK does not generally require direct regulation by the Financial Conduct Authority (FCA) in the same way as consumer credit. However, providers may be members of industry bodies like UK Finance’s Invoice Finance and Asset Based Lending (IFABL) group, which sets best practice guidelines.

• Current resources:

  If you have a dedicated credit control team and good payment collection processes, discounting might be more cost-effective.

• Confidentiality:

  If you want to keep financing arrangements private, invoice discounting is usually the better choice.

• Size and stage of the business:

  Smaller businesses may find factoring more accessible, as it often comes with extra services like credit control.

• Cost:

  Always compare quotes from different providers (banks and specialist financiers) to see which model best fits your cash flow needs and budget.

In general, using factoring or discounting does not directly hurt your business credit rating. It may even help improve your financial health if it strengthens your cash flow. The key is to maintain a strong repayment history with the provider.

• Seasonal or project-based industries

  (like manufacturing or construction) often benefit when they need working capital in between large invoice cycles.

• Service-based companies

  or

• B2B

  suppliers that regularly invoice clients on net-30, net-60, or longer terms use factoring or discounting to smooth cash flow.

Once you set up a factoring or discounting arrangement, you can typically access funds within 24 hours to a few days after issuing an invoice. This speed is one of the main benefits compared to waiting 30, 60, or 90 days for a customer to pay.

Confidential factoring is where the lender handles your credit control, but does so in your name. In other words, your customer will think they’re dealing with you directly, when in fact the lender is handling the sales ledger. This is another good solution for businesses that want to keep confidentiality.

CHOCS stands for Client Handles Own Collection Services, and it's sometimes known as Client Handles Own Credit Control Services (CHOCCS). The two terms mean more or less the same thing: this is a type of factoring where you retain control of your sales ledger, meaning you can maintain and develop relationships with your customers. This is useful if your business is not eligible for invoice discounting, but you want to retain control of your sales ledger.