Invoice factoring and invoice discounting are both forms of invoice finance. In each case a finance provider advances funds against eligible unpaid invoices, and the business receives the balance, less charges, once its customers pay.
The difference lies mainly in who runs collections and whether customers know about the arrangement. That affects your customer relationships, your workload and what a provider will expect from you. If you are new to the product, start with invoice finance explained.
The core difference
With invoice factoring, the provider takes on the management of your sales ledger. Its credit control team typically chases payment, and customers pay the provider directly. In effect, you outsource collections as well as raising finance.
With invoice discounting, you keep running your own sales ledger and credit control. Your team chases customers, payments go into an account the provider has rights over, and you report regularly to the provider on invoices raised and cash collected. It is often confidential, so customers may not know a facility is in place.
Side by side
| Factoring | Discounting | |
|---|---|---|
| Who chases payment | Usually the provider | You |
| Customer awareness | Typically aware | Often confidential |
| Customer contact on payment | The provider | You keep control |
| Reporting to the provider | Lighter, as the provider runs the ledger | Regular reports, plus periodic checks |
| Often suits | Smaller or growing businesses without credit control resource | Established businesses with strong credit control and reporting |
These are typical positions rather than fixed rules. Some providers offer variations, including discounting facilities that are disclosed to customers. The terms of a specific facility matter more than its label.
Want to know which options may suit your business?
Choosing between them
The right fit usually depends on your internal resources and how you want customers handled.
Factoring can suit a business that:
- does not have the time or people to chase invoices consistently
- is comfortable with a third party contacting customers about payment
- would value an outsourced collections function while it grows
Discounting can suit a business that:
- already has effective credit control and a well-run sales ledger
- produces accurate, timely management information
- wants to manage customer relationships itself and keep the facility confidential
Providers will also form their own view. Discounting places more reliance on your systems, so providers often look for a longer trading record, robust processes and a well-spread sales ledger. Some businesses start with factoring and move to discounting as their finance function develops.
A commercial finance intermediary such as Emirex Finance can help you compare how different providers structure each option, as described in how it works.
Recourse and non-recourse is a separate choice
Whether a facility is factoring or discounting says nothing about who bears the risk of a customer failing to pay. That is a separate decision, and both products can usually be arranged either way, depending on the provider.
- Recourse. If a customer does not pay, the business remains responsible. The provider can recover the funds it advanced against that invoice.
- Non-recourse. The provider takes on some of the credit risk on approved customers, up to agreed limits and subject to conditions. This protection usually adds to the cost, and it does not normally cover disputes about the goods or services supplied.
When comparing offers, check exactly what any bad debt protection covers, the credit limit set for each customer, and what happens to invoices that fall outside those limits. Recourse terms also affect what you would owe the provider if a large customer ran into difficulty, so factor that into your working capital planning.
Key points
- Factoring and discounting both fund unpaid invoices. The main difference is who manages collections.
- Factoring usually means the provider chases payment and customers are aware of the arrangement.
- Discounting keeps collections in-house and is often confidential, but providers typically expect stronger controls and reporting.
- Recourse or non-recourse is a separate choice about who bears bad debt risk, and protection terms vary by provider.
Looking for funding for your limited company?
Tell us what you need and we’ll review your requirements before contacting you to discuss potential options.
This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.