Factoring or invoice discounting: how to choose

Factoring and invoice discounting both release cash against unpaid invoices. The funding mechanics are much the same. The difference lies in who runs credit control, whether your customers know, and what that means for cost and control.

Who collects the money

In a factoring facility, the provider takes over collections. Their team contacts your customers, chases overdue invoices and receives payment. In invoice discounting, you continue to run your own credit control and customers pay into a nominated account.

This single difference drives most of the others. If your business does not have the time, people or inclination to chase payments, factoring hands the job to a professional team. If you have a competent credit control function and value the customer relationship, discounting keeps it in your hands.

Whether customers know

Because the provider is in contact with your customers, factoring is normally disclosed. Invoice discounting can often be arranged confidentially, so customers see no change. Confidentiality is at the provider's discretion and is more readily offered to businesses with strong systems and reporting.

Whether disclosure matters is a commercial judgement. Many business customers are entirely familiar with factoring and think nothing of it. Others may prefer not to see a third party involved.

Cost and eligibility

Factoring service fees tend to be higher because the provider is doing more. Against that, you save the cost of running credit control in-house. Discounting fees are generally lower, but providers expect more of your systems and will want to see reliable ledger management and reporting.

For that reason, factoring is often more accessible to smaller or newer businesses, while confidential discounting is more commonly offered to established firms.

A simple way to think about it

• Would collections support genuinely help? Lean towards factoring.
• Is customer confidentiality important and are your systems robust? Lean towards discounting.
• Do you only need to fund occasional invoices? Consider a selective facility instead.

Some businesses start with factoring and move to confidential discounting as they grow and their processes mature. Providers are generally open to that progression.

The right facility is the one that matches how your business actually operates, not the one with the lowest headline rate.

If you are unsure, an initial conversation with a broker will usually make the answer clear fairly quickly.