Factoring

Q: What's the difference between factoring and invoice discounting?

In factoring, the provider manages collections and your customers know they're involved. In invoice discounting, you keep control of your sales ledger and chase payment yourself, so the arrangement stays confidential. The funding mechanism is otherwise similar.

2 min read

80–90%Typical advance

24–48 hrsSpeed to cash

In plain terms

Factoring turns the money you're owed into money you can use today. Instead of waiting 30, 60 or 90 days for customers to pay, you sell those invoices to a factoring company. They advance most of the value straight away — often 80–90% — then take over collecting the debt and pay you the rest, minus their fee, once the customer settles.

The defining feature is that the factor manages the sales ledger and chases payment. Your customers deal with the factor, which is why factoring suits businesses comfortable with that visible involvement. Where you'd rather keep collections in-house and confidential, invoice discounting is the quieter alternative.

How it works step by step

You raise an invoice and send a copy to the factor.
The factor advances a percentage — say 85% — usually within a day or two.
The factor manages collection and chases the customer for payment.
When the customer pays, the factor releases the remaining balance to you, less its service charge and a discount fee.

Two costs apply: a service fee for running the ledger, typically a small percentage of turnover, and a discount fee charged like interest on the cash advanced. See business finance fees explained for how these stack up.

Why it matters to your business

Factoring directly attacks the cash-flow gap created by long payment terms. For a business that sells to other businesses on credit, it converts the balance sheet's biggest frozen asset — its receivables — into working capital that funds wages, stock and growth.

It also offloads credit control. Outsourcing collections frees up your team and, in the case of non-recourse factoring, can protect you against a customer going bust. The trade-offs are cost and customer awareness: factoring is usually dearer than a simple overdraft, and your customers know a third party is involved. Weigh it against alternatives in our working-capital finance guide.

Recourse versus non-recourse

The biggest distinction in factoring is who carries the risk if a customer never pays:

Recourse factoring: you remain liable for unpaid invoices, so if a customer defaults you repay the advance. It's cheaper because the factor takes less risk.
Non-recourse factoring: the factor absorbs approved bad debts, giving you protection against customer insolvency — at a higher fee.

Choosing between them comes down to how concentrated and creditworthy your customer base is. A handful of large customers makes non-recourse cover more valuable.

Frequently asked questions

What's the difference between factoring and invoice discounting?

In factoring, the provider manages collections and your customers know they're involved. In invoice discounting, you keep control of your sales ledger and chase payment yourself, so the arrangement stays confidential. The funding mechanism is otherwise similar.

Will my customers know I'm using factoring?

Usually yes, because the factor handles collections and payments are directed to them. If confidentiality matters, invoice discounting or confidential factoring keeps the arrangement hidden from customers, though it typically requires a stronger credit profile.

Is factoring suitable for small businesses?

It can be, particularly for B2B firms with reliable customers and long payment terms. The main considerations are cost versus a simple loan or overdraft, and whether you're comfortable with the provider contacting your customers directly.