Factoring versus invoice discounting

  • Use your sales ledger to raise capital
  • Factoring and invoice discounting are collectively referred to as invoice finance, though they're very distinct products.
  • Both facilities are used by businesses looking to raise cash using their sales ledger.
  • This guide provides information on how factoring and invoice discounting work, the differences, the pre-eligibility criteria for invoice finance, its advantages and how to access both facilities.


Factoring, also known as 'invoice factoring' is a type of business finance where money is advanced to you against the value of your outstanding invoices. The factor releases cash against your existing debtor ledger and funds invoices as you raise them.

The factor provides up to 90% of the value of your invoice and makes available the 10% balance as soon as your customer settles their invoice. Essentially, the factor provides a debt collection and ledger management service.

The invoice discounter releases up to 90% of the invoice value whilst you chase your customers

Invoice discounting

Invoice discounting is a suitable way of drawing money against your outstanding invoices. However, your business retains full control over the management of your sales ledger. It is not just a ‘funding only’ facility as it offers valuable support and credit insurance.

The invoice discounter releases up to 90% of the invoice value whilst you chase your customers. The remaining 10% is made available when your customers pay.

How Invoice finance works?

Invoice finance operates in the following way:

  • Invoice your customers for goods and/or services provided and send a copy of the invoice to the lender
  • The lender would then make available to you a pre-arranged percentage of the total unpaid sales ledger – typically about 80-90% of the invoice
  • For factoring, the lender retains full control over the administration of your sales ledger. With invoice discounting, you handle all aspects of credit control, including chasing customers and collecting payments
  • Your customer settles the full value of their invoice The finance provider then makes available the remaining balance (10-20% of the invoice), less any charges

Differences between factoring and invoice discounting

Credit control: Invoice discounting advances cash from your debtor invoices in the same way as factoring – however, the lender doesn’t provide any credit control service to help collect your outstanding payments. Your business is responsible for chasing your customers and collecting payments.

Target market: Factoring is traditionally used by SMEs (including start-ups) with an annual minimum turnover of about £50,000. On the other hand, invoice discounting is suitable for established businesses with a proven track record of trading and an annual turnover of at least £350,000.

Am I eligible for invoice finance?

Your business could qualify for invoice finance (factoring and invoice discounting) if:

  • You sell products or services on credit to other businesses
  • You issue invoices with payment terms of between 30-120 days
  • There is evidence that the products and services have been delivered and invoiced

Benefits of invoice finance

Making use of factoring or invoice discounting can offer your business the following benefits:

  • Improved cashflow: Up to 90% of the outstanding funds released within 24 hours of raising an invoice.
  • Option of bad debt cover: By means of a non-recourse facility, the lender offers bad debt protection as an insurance against customer defaults. This safeguards profits, cashflow and the balance sheet.
  • Sales ledger control: With factoring, the factor takes over the management of your sales ledger, tailored to how you wish to trade.
  • Extra working capital: The funds advanced allow you to cover overheads and pay your bills on time.
  • Grows with your business: The most suitable applicants for factoring and invoice discounting are growing businesses because the level of funding grows in line with the turnover.
  • Flexible: Both facilities give you access to an ongoing supply of cash that grows as your turnover grows.
  • Supplier discounts: Improved bargaining power which enables you take advantage of early supplier discounts.

Choosing a lender for either factoring or invoice discounting could be a costly mistake. Invoice finance is best offered by a commercial finance broker as they have access to the leading lenders that can fuel growth into your business.

They would then allocate the most suitable lender on their panel, based on your business's needs.

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