Understanding the differences between invoice discounting and factoring

Last Modified 16th of February 2021

More and more companies are finding a lifeline in invoice finance companies. However, there are many more small and medium sized enterprises (SMEs) which are failing to take advantage of the service because they find the variety of terms confusing.

One of the most frequently asked questions to providers of invoice discounting and invoice factoring services is – what’s the difference? It’s very important that invoice finance companies ensure that they are putting the message about what they do across in a clear and user-friendly manner, helping SME owners to understand the benefits and distinctions between the two terms, particularly over traditional bank loans or asset finance.

What is invoice discounting?

Invoice discounting is a service in which the financial company releases funds into your account, using your invoices as security. You retain control of your invoice administration and credit control processes. The finance company is essentially an invisible interface between you and your suppliers.

However, if you choose confidential invoice discounting, the finance provider can handle the credit control in a confidential manner, so that your customers are unaware of the involvement of the finance provider.

The benefit to your business is that you get cash in your account without delay, and the funding available to you is able to increase as your business grows, without complex re-negotiations of your contract. It is a popular scheme for any company with customers who frequently pay late, causing cash-flow problems, but who want to maintain a direct relationship with their customers and handle their own credit control.

What is invoice factoring?

Factoring also allows you to release cash for your business by using your invoices as security, but unlike Invoice Discounting, with Factoring the service provider chase the customers payments on your behalf, allowing you to concentrate on other important areas of running and developing your business.

As with discounting, the benefit is that you have cash in your account when you need it, and the funding available to you is able to increase as your business grows. An additional benefit is that you no longer need to pay staff in your credit control team, as this will be managed by the factoring company.

Invoice factoring is an ideal scheme for fast-growing or developing companies that suffer from cash-flow problems due to frequently late-paying customers, and feel that they could benefit by utilising their credit control staff in other areas of their business.

To find out more about invoice discounting and factoring, look out for reputable, fully accredited invoice finance companies who might be willing to talk you through the potential advantages to your company.