Invoice Discounting vs Invoice Factoring: What Is the Difference?
Published 20th of June 2011·Updated 6 April 2026
Reviewed by: Reviewed for accuracy April 2026
Invoice discounting and invoice factoring both release cash tied up in unpaid invoices, but they differ in one key way: with discounting, you manage your own credit control and customers never know a finance company is involved; with factoring, the finance company chases payment on your behalf. Factoring suits businesses that want to outsource credit control; discounting suits those that want to keep that process in-house.
Short Summary
Both products let you access up to 80 to 90 per cent of the value of an unpaid invoice within 24 to 48 hours, rather than waiting 30, 60 or 90 days for your customer to pay. The finance company then collects payment from your customer and releases the remaining balance to you, minus its fee.
Invoice discounting is confidential. Your customers continue to receive payment requests from you directly, and they have no knowledge that a third party is involved in your finances.
Invoice factoring transfers the credit control function to the finance company. Your customers will receive payment requests from the factor, which means your relationship with them is affected. This is a significant consideration if you have long-standing client relationships.
Both products are forms of asset finance regulated by the Asset Based Finance Association (ABFA), now part of UK Finance. The FCA regulates some aspects of invoice finance, particularly where agreements are consumer-facing.
What is invoice discounting?
Invoice discounting is a facility where a finance company advances you a percentage (typically 80 to 90 per cent) of the face value of your outstanding invoices. You continue to manage your own sales ledger, send payment reminders to customers and collect payment yourself. Once the customer pays, the finance company releases the remaining balance minus their service fee.
The arrangement is confidential, meaning your customers see no change in how they are billed or chased for payment. For businesses that have built strong client relationships, this is a significant advantage. Invoice discounting is best suited to businesses with an established credit control function and customers with reliable payment histories.
Typical fees for invoice discounting run from 0.2 to 0.5 per cent of the invoice value as a service charge, plus a discount charge (effectively an interest rate) on the funds drawn down. Providers including Bibby Financial Services, Aldermore and Close Brothers Asset Finance offer invoice discounting facilities.
What is invoice factoring?
Invoice factoring works on the same basic principle: the finance company advances a percentage of your invoice value immediately. The key difference is that the factoring company takes over your credit control function and chases your customers for payment directly. Your customers will know that a factor is involved because payment requests will come from the factoring company rather than from you.
The practical benefit is that you no longer need to dedicate staff time to chasing late payments. For fast-growing businesses that do not have a dedicated credit control team, this can be valuable. Invoice factoring also tends to be more accessible for newer businesses than invoice discounting, as factors assess the creditworthiness of your customers rather than your own business's trading history.
Fees for factoring are typically slightly higher than for discounting, reflecting the additional service provided. Expect a service fee of 0.5 to 3 per cent of invoice value depending on your turnover, sector and the volume of invoices processed.
How do invoice discounting and factoring compare?
| Feature | Invoice discounting | Invoice factoring |
|---|---|---|
| Customer awareness | Confidential | Customers know factor is involved |
| Credit control | Managed by you | Managed by finance company |
| Typical advance rate | 80-90% of invoice value | 80-90% of invoice value |
| Best suited to | Established businesses with credit control | Growing businesses or those without credit control staff |
| Typical service fee | 0.2-0.5% of invoice value | 0.5-3% of invoice value |
| Accessibility for new businesses | Lower | Higher |
Which option is right for your business?
The decision comes down to two factors: whether you want to maintain confidentiality with your customers, and whether you have the internal resources to manage credit control.
Choose invoice discounting if your business has been trading for two or more years, has a structured credit control process, turns over at least £500,000 per year (many providers require this as a minimum), and values keeping your financing arrangements private from customers.
Choose invoice factoring if your business is newer or growing rapidly, you do not have dedicated credit control staff, your customers are slow to pay and you spend significant time chasing invoices, or your customers are accustomed to dealing with third-party payment processors in your sector.
For smaller businesses or those with only occasional cash flow gaps, selective invoice finance (also called spot factoring) allows you to raise funds against individual invoices rather than your entire ledger. Providers including Market Invoice and Kriya (formerly MarketFinance) offer this product to UK businesses.
What should you check before signing an invoice finance agreement?
Read the contract carefully before committing. Key points to check include: the minimum contract period (many agreements tie you in for 12 to 24 months), the notice period required to exit the agreement, any minimum monthly fee and how the service charge is calculated.
The British Business Bank's Business Finance Guide provides independent guidance on invoice finance alongside other funding options. For personalised advice, a commercial finance broker who is a member of the National Association of Commercial Finance Brokers (NACFB) can help you compare products from multiple lenders.
Frequently Asked Questions
Does invoice finance affect my credit rating?
Using invoice finance does not directly affect your business's credit rating. However, the finance company will conduct credit checks on your customers as part of their due diligence. If a customer has poor credit, the finance company may decline to advance against invoices raised to that customer.
Can a small business use invoice finance?
Yes, though minimum turnover requirements vary by provider. Many traditional invoice finance companies require a minimum annual turnover of £250,000 to £500,000. Spot factoring providers such as Kriya and Market Invoice are accessible to smaller businesses with no minimum turnover requirement, though they advance against individual invoices rather than offering a revolving facility.
What happens if my customer does not pay?
This depends on whether your agreement is recourse or non-recourse. Under a recourse agreement (the most common type), if your customer fails to pay, the outstanding amount is returned to your ledger and you are liable for repaying the advance. Under a non-recourse agreement, the finance company absorbs the loss if a customer becomes insolvent, though you will pay a higher fee for this protection.
Is invoice finance the same as a business loan? No. Invoice finance is an asset-based product that advances money against invoices you have already raised. A business loan is a separate product with fixed repayment terms regardless of your customer payment timing. Invoice finance can be more flexible for businesses with uneven cash flow, while a business loan is more predictable.
How quickly can I access funds through invoice finance?
After an initial setup period (typically one to two weeks while the finance company completes its due diligence), you can usually access funds within 24 to 48 hours of submitting a new invoice. Some providers offer same-day funding for established clients.