For many businesses, unpaid invoices can put a strain on cash flow. Invoice finance offers a solution by allowing you to access funds tied up in invoices. But within invoice finance, there are two main options: invoice factoring and invoice discounting. While both provide immediate access to cash, they work differently and suit different business needs.
Understanding the differences can help you choose the right solution for your company.
What is invoice factoring?
Invoice factoring is a type of invoice finance where the provider manages your customer payments and credit control. Essentially, you sell your unpaid invoices to the provider, who then advances a percentage of the invoice value. They also handle the collection process, contacting your customers and chasing payment.
Key features of factoring:
- Provider manages collections and credit control.
- Immediate cash advances on invoices, usually 70 to 90% of the invoice value.
- Ideal for businesses that want to reduce administrative burden.
- Can provide protection against late-paying or non-paying customers.
Factoring is particularly useful for businesses that want help managing collections while unlocking cash flow.
What is invoice discounting?
Invoice discounting also allows you to access funds tied up in invoices, but your business retains control of collections. You continue invoicing customers as usual and the lender provides an advance on outstanding invoices. Once the customer pays, the remaining balance (minus fees) is released.
Key features of discounting:
- Business maintains control over customer relationships
- Confidential to customers, they may not know a lender is involved
- Ideal for businesses confident in managing collections
- Provides quick access to cash without altering invoicing processes
Discounting is often preferred by businesses that want flexibility and discretion in how their customers are handled.
When to use factoring or discounting
Use invoice factoring if:
- Your business struggles with slow-paying customers
- You want to reduce administrative tasks
- You need support managing credit control
- You want some protection against bad debt
Use invoice discounting if:
- Your business can manage collections efficiently
- You prefer confidential funding
- You want to maintain direct relationships with customers
- You need quick access to cash without altering operations
Both options provide immediate access to working capital, but the choice depends on your business needs, customer relationships and internal capacity to manage invoices.
To summarise
Invoice factoring and invoice discounting both help businesses unlock cash tied up in unpaid invoices.
- Factoring – The provider handles collections and credit control which is great for businesses needing extra support.
- Discounting – Your business retains control and keeps the process confidential, ideal for businesses confident in managing payments themselves.
Working with a specialist broker like NGI Finance can help you compare providers, understand fees, and choose the solution that best suits your business needs. If you would like to discuss, please call our business finance team on 01993 706403 or email enquiries@ngifinance.co.uk.
