Invoice Discounting vs Factoring

Updated: 5 July 2022

Managing cashflow is essential to the success of any business. If you issue invoices for goods or services to other businesses, invoice finance could give you the funding you need.

What’s the difference between factoring and invoice discounting?

There are two key types of invoice finance; factoring and invoice discounting. Learning more about each of these may help you decide which option is right for you.

What is factoring?

If your business has money tied up in outstanding invoices, factoring is a funding solution that enables you to access your cash as soon as you raise an invoice, rather than waiting for customers to pay. You invoice your customers as normal and the factoring provider releases an agreed percentage of the invoice value (typically between 80%-95%) within 24 hours. They also handle the chasing payments and managing credit control, while you are freed up to concentrate on other business priorities.

What is invoice discounting?

Invoice discounting is another way to release funds owed in unpaid invoices. As with factoring, you invoice your customers as normal and the invoice discounting provider releases an agreed percentage of the invoice value (typically between 80%-95%) within 24 hours.

Unlike factoring, you maintain responsibility for chasing payments and managing your credit control. You keep control of your customer relationships, and your customers pay into a bank account in your name. You can choose to let your customers know you are using invoice discounting, or you can keep the service confidential.

How can my business benefit from factoring or invoice financing?

Although there are differences between the two arrangements, the benefits of both factoring and invoice discounting are the same:

  • Entering an arrangement means you can release up to 95% of the value of any outstanding invoices and have the cash in your account within 24 hours. And this funding is available without taking on the additional debt you would have to with a business loan.
  • Factoring and invoice discounting are agile funding options that adapt to the changing financial circumstances of your business and, unlike business loans and overdrafts, offer flexible funding without the headache of having to renegotiate the whole arrangement.
  • Once you’ve released the cash you can use it to alleviate cashflow or help your business grow. And if you use the money to help with cash flow, this means you’ll be able to promptly pay supplier invoices and this, in turn, can give you greater power to negotiate future discounts.

What’s the best solution for my business?

This all depends on the specific circumstances and needs of your business, but factoring works better for businesses that would benefit from gaining time and resource back to focus on other tasks by outsourcing credit control.

On the other hand, invoice discounting may be better suited to businesses with dedicated finance departments trained to deal with debt collection and cash flow.

To help you find the best solution for your business, Bibby’s team of business funding experts are on hand to make sure you make the right decision. Contact Us or call the team direct on 0808 501 6462.