What's the difference between invoice discounting and factoring?

Invoice finance is a common way of releasing funds from unpaid invoices. There are two types of invoice finance: invoice discounting and invoice factoring. But they work differently and handle distinct business concerns. The primary difference is who collects the invoices. With discounting, your business still stays liable; with factoring, the finance provider takes over. This article describes how each works, how much they cost, and which might be best for your business.

Note: All the research on figures and costs is correct as of time of publishing. However it is important for customers to do their own market research to find the product that's best for their business.

What is invoice financing? Key differences

Invoice financing allows businesses to get money upfront based on the value of unpaid bills, rather than waiting for payment from customers. This allows companies to manage their cash flow when customers are late paying their invoices.

Table of comparisons: Invoice discounting and factoring

What is invoice discounting?

Invoice discounting means your business is borrowing money on the basis of unpaid invoices. You still collect payment from your customers and the finance provider remains confidential to your business ties. The advance is usually 70-95% of the invoice value, though this varies by lender. When your customer pays, you pay back the advance plus interest and fees to the lender.

How does invoice discounting work?

1. Create invoice - Bill your customer as normal
   
2. Request advance - You send the invoice to the finance provider
   
3. Get cash – You get an advance (usually 70-95% of invoice value) in 24-48 hours
   
4. Collect payment – You get payment from your customer
   
5. Repay provider - You pay back the advance, including fees and interest, to the finance provider.

What is invoice factoring?

Invoice factoring is when a financing provider (called a factor) buys your invoices in full. The factor takes over as the creditor and has the obligation of collecting payment from your customers. Usually the factor will pay you 80-90 % of the invoice value and then pay you the balance (less fees) once they have collected from your customer.

How does invoice factoring work?

1. Invoice sale - You sell the invoice to the factor

2. Get advance – Obtain 80-90% of invoice value within 24-48 hours

3. The factor collects – The factor reaches out to your customer and collects payment

4. Get the rest – The factor pays you the balance less their cost

Invoice discounting v factoring: costs

Understanding the costs and fee structure of each option will help you choose the right one for your business. 

Costs of invoice discounting usually include:

• Service charge: 0.2-1.5% of invoice value or gross turnover per month

• Interest rate: Varies by provider and credit score

• No collection costs: You collect so you don't pay for this

The costs of invoice factoring often include:

• Service fee: 1-3% of invoice value monthly

• Collection fees: Factors will include additional fees for credit control and collections within your service fee.

• Potential saving: You minimise in-house credit control costs

Main Difference: Factoring normally has a higher cost because the factoring company will handle the collections. But this additional expense may be mitigated by savings in your own credit control department.

What are the advantages of invoice finance?

• Fast cash flow – Get paid in 24-48 hours instead of waiting for your customers

• Better working capital - Free cash for investment in expansion, inventory or operations

• Reduced administration – Less effort chasing late payments (factoring) or simple collection (discounting)

• Flexible funding — borrow as you need, not a set loan

• Scalable – Grow your funding with your sales

What are the cons of invoice finance?

• Recurring fees — Interest and monthly fees go into your profit margin

• Customer relationship impact - Factoring could be exposed to your customers as being financed

• More expensive than loans — Invoice finance often costs more than traditional business loans

• Eligibility conditions – Requires continuous invoicing and credit-worthy customers

• Not suitable for all businesses – Ideal for B2B companies who invoice on a regular basis

Which one is right for your business?

Things to consider while deciding between invoice discounting vs factoring:

1. How important is control over your customer relationships?

If you want to manage your sales ledger and keep your relationships with your customers, invoice discounting is the better option. With factoring, however, the lender is in control of collections, which could affect how your customers see your firm.

2. Can you afford to make regular repayments?

Invoice discounting requires you to make recurring repayments of the loan whether or not you collect from customers. This can be tough if your cash flow is inconsistent. With factoring there are no repayments, you just pay costs when the factor collects.

3. How important is confidentiality?

If you don't want your customers to know you are using invoice finance, discounting is more discreet. When it comes to factoring, customers find out about it when they receive a call from the factor asking for payment. If you're struggling with persistent late payments, it's vital to understand how to improve your payment collection.

4. What are your cost priorities?

If cost is your primary concern, invoice discounting is usually cheaper, as you manage collections yourself. Factoring is more expensive but you don't have your credit control expenses.

5. What is the size of your business?

Bigger companies with a high monthly turnover can negotiate better pricing on either product. Smaller firms may be able to qualify for factoring more readily because factors are less concerned with your business performance. Working capital loans are a means for companies to address cash flow without getting into the whole invoicing process.

Related reading

• Invoice factoring costs explained

• What is cash flow and how do you manage it?

• 5 ways to improve cash flow in your business

Frequently Asked Questions

Is invoice finance expensive?

Invoice finance costs vary greatly depending on your business, supplier and product. Discounting usually costs 0.2-1.5% per month. Factoring normally costs 1-3% a month + service fees. For most businesses this is less than the cost of late payments (staff time, overdraft interest, disruption to cashflow). 

Is invoice discounting cheaper than factoring?

Generally, yes. Invoice discounting is often 0.5-1.5% cheaper per month than factoring because you handle collections yourself, saving the factor's overhead costs. However, once you factor in the cost of your own credit control team, the difference narrows. When you account for all costs, factoring works out cheaper for certain businesses. 

Can small businesses use invoice discounting?

Yes, but there are a few criteria. Most providers would want a minimum monthly turnover (usually £20,000+), history of payments and UK based customers. You also need to be good at organisation, invoicing and record-keeping. If you don't fit these criteria, factoring may be easier to qualify for. Factors vary between providers so it’s important to check your options first.

What is confidential invoice discounting?

Confidential (or undisclosed) invoice discounting is where your customers have no knowledge of the finance provider at all. Your customers pay you, not the lender, so don't realise you are utilising invoice finance. This makes it a good choice for businesses that want to keep their invoice discounting confidential.

If you need short term cash flow to help with long payment terms or late payments, a FlexiPay – line of credit could help. You can apply for a credit limit of up to £250,000, which you can use to pay business costs and repay over 3 months. All payments are made in your name so it's completely confidential.

Disclaimer

02/07/2026 – While we try to help as much as we can, the content presented here is for information purposes only and should not be used as financial or legal advice. Funding Circle does not warrant or guarantee the accuracy of the content provided and, to the extent permitted by law, Funding Circle shall not be liable for any loss or damage which may arise directly or indirectly from the use of or reliance on the information contained herein. If you have any questions, you should consult your professional counsel or obtain independent legal advice.