Invoice Factoring and Discounting: What’s the Difference?

Cash flow problems? You’re not alone.
Every SME owner knows the struggle of waiting for clients to pay up while bills and growth opportunities pile up. But guess what? There’s a way to unlock the money trapped in those unpaid invoices – and it’s not another loan.
Meet invoice financing: specifically, factoring and discounting. These tools turn those slow-paying invoices into fast cash – a lifeline for businesses looking to grow and scale in the here and now.
Think you already know the basics? Stick around. Understanding the nuances between factoring and discounting helps you pick the right solution.
We’ll break it down so you can make smart choices that boost your cash flow without adding extra headaches.
Let’s get into it.
An Introduction to Invoice Factoring
Think of invoice factoring as selling your unpaid invoices for fast cash.
You get a good chunk of the money upfront, minus a fee, instead of waiting weeks or months for customers to pay.
Here’s how it works:
- You issue an invoice: Business as usual – you provide your goods or services.
- You sell the invoice: A factoring company buys it, usually paying you 80-90% of the value right away.
- Customer pays the factor: Your customer eventually pays the full invoice directly to the factoring company.
- You get the rest (minus fees): The factor sends you the remaining balance after taking their fee out.
So, let’s say you have a client invoice worth £1,000, and you need some upfront cash to manufacture some products for an order.
Instead of waiting for that money to come in, you can simply sell your invoice to a financing company, typically for a 1.5 – 5% fee, on average, and you’ll get back, in this case, £900.
The invoice is gone, so there’s no more waiting around or having to chase it up, and that money is right there, in your bank account, ready to spend.
As you can imagine, there are plenty of benefits to this kind of financing;
- Immediate cash flow boost: Don’t let slow-paying clients hold back your growth.
- Outsourced collections: The factor handles chasing down payments, saving you time.
- No need for traditional collateral: Your unpaid invoices are the security; good credit isn’t always essential because the money is already covered.
However, while there are a lot of positive benefits, there are some important considerations to remember;
- Customers are aware: They’ll know you’re using a factoring company, which might impact some relationships.
- Higher fees than loans: Factoring can be pricier than a traditional bank loan.
- You lose control over collections: If you value a personal touch with customers, this might not be ideal.
So, is invoice factoring right for you?
Factoring is great if you need cash NOW, struggle chasing payments, or are growing fast. It might not be the best fit if customer relationships are very delicate or you want total control over collections.
An Introduction to Invoice Discounting
Invoice discounting is like taking a short-term loan against your unpaid invoices.
You get a good chunk of the invoice’s value upfront, and the finance company waits for your customer to pay them normally. Here’s the breakdown:
- You issue an invoice: Same as always, you do your work and bill the client.
- Discounting company advances cash: They’ll lend you up to 85% (or so) of the invoice value minus their fee.
- YOU collect payment: Your customer relationship stays the same – they pay you directly.
- You repay the loan (plus fees): Once the invoice is paid, you repay the discounting company what you borrowed, plus their fees.
So, using the same example above, you have a £1,000 invoice sitting there.
You need the money now so you get in touch with an invoice discounting provider who gives you £850 against that invoice, minus a 1 – 5% fee. You then have the money upfront ready to spend as and when you please.
However, you will need to pay this money back. When you get the invoice paid (you’ll let the discounting company know when it’s due), you just hand the money straight over to the company, and the credit will be considered paid off.
Key Advantages
- Fast cash, no customer hassle: Get money quickly without changing how your clients pay.
- Boost cash flow for growth: Gives you working capital to invest, hire, or pay suppliers on time.
- It’s discreet: Unlike factoring, your customers won’t know you’re using this financing tool, and they’ll still deal with you.
But there are some considerations to remember:
- You’re in charge of collections: If a customer doesn’t pay, you’re still on the hook for the loan, and there is usually interest to pay on late payments.
- Responsibility = Risk: You need good credit control systems in place to make this worthwhile. This is very similar to taking a loan in the traditional sense.
- Fees add up: It can be more expensive than a traditional loan in the long run.
Is it Right For You?
Invoice discounting is a good fit if you have reliable clients, substantial in-house collections, and want to keep your financing arrangements private.
Comparing Invoice Factoring and Discounting

Let’s break down the key differences because choosing between factoring and discounting impacts more than just cash flow:
Feature | Invoice Factoring | Invoice Discounting |
Invoice ‘Ownership’ | You sell the invoice outright to the factoring company. | You keep the invoice, it’s used as collateral for a loan. |
Collections | The factoring company handles chasing down payments. | Your business remains in charge of collections. |
Risk | Factor bears some of the risk if a client doesn’t pay. | Your business bears the full risk of non-payment. |
Fees | Typically higher due to included collections service. | Can be less upfront, but interest adds up over time. |
Beyond the Basics
Speed
Both offer fast cash (usually 24-72 hours). Specifics depend on the provider.
Control vs. Convenience
Factoring is hands-off, but you lose control over the customer experience. Discounting keeps you in the driver’s seat but demands good collections processes.
Costs are complex
Don’t just look at the upfront fee. Factor in your time to chase payments (discounting) vs. the longer-term cost of interest.
How to Make the Right Decision for Your Business
So, bringing all this together, how do you know whether factoring and discounting in either sense is right for you?
Well, note that there’s no one-size-fits-all solution, and the right choice for you depends on these key factors:
- Control vs. Convenience: Are you willing to hand over collections to save time and hassle (factoring), or do you prioritise direct customer contact (discounting)?
- Speed of Cash: How urgent is your need? Factoring can sometimes be slightly faster, especially if your collections process is slow.
- Cost vs. Risk: Factoring’s higher fees buy you some peace of mind if clients don’t pay. With discounting, you bear that risk but may save on longer-term fees.
- Your Business Profile: Startups or those with less-than-perfect credit may find factoring easier to qualify for. Established businesses with reliable clients often prefer discounting.
Some smart questions to ask yourself that can help with this decision;
- Will my customers be bothered if a third party collects payment? If so, discounting is better.
- Do I have the time and systems in place to chase unpaid invoices efficiently? If not, factoring’s hands-off approach is appealing.
- Is my cash crunch temporary, or is it a sign of deeper financial issues? Temporary problems favour factoring; bigger issues mean looking beyond just cash flow.
The Bottom Line: Don’t just compare factoring and discounting to doing nothing. Consider if a traditional loan or line of credit might be a better long-term fit for your business.
Final Thoughts
Factoring and discounting – both can unlock the cash trapped in your invoices. But as you’ve seen, the right choice is more than just getting money fast. It’s about:
- Protecting customer relationships (if that’s a priority, discounting usually wins)
- Balancing your need for control with your need for time (factoring saves time)
- Understanding your true cost tolerance (long-term fees matter as much as upfront ones)
The Next Step: Knowledge is power, but it’s not the same as action. If you’re ready to explore whether factoring and discounting is the right move for your specific business, don’t go it alone.
Adept Business Finance specialises in custom solutions for SMEs.
We’ll help you assess the pros, cons, and true costs of both factoring and discounting.
Get a free, no-obligation consultation today and let’s find the strategy that fuels your growth, not just eases short-term pain.