Both advance you cash against unpaid invoices, on the same timescale, at similar advance rates. With factoring the lender collects the money and your customers know. With discounting you collect it yourself and they never find out. Everything else follows from that one split.
Change either number and both sides update.
The lender runs your sales ledger and chases your customers for payment.
You keep collecting. The lender never contacts your customers.
Discounting is cheaper, but you have to qualify for it. These three questions are roughly the screen a lender applies before deciding which product to quote.
This does not change which product you get, but it changes how much cash you actually receive.
| Factoring | Invoice discounting | |
|---|---|---|
| Who chases payment | The lender. Their team contacts your customers directly and takes the calls. | You do. The lender never speaks to your customers. |
| What customers see | Disclosed. Invoices carry a notice of assignment and payment goes to the lender. | Confidential. Customers pay into a trust account in your own name. |
| Cost | Higher service fee, because it includes the collections work. | Lower service fee. Discount margin is similar on both. |
| Who can get it | Most trading businesses, including start-ups and weaker internal systems. | Proven credit control, reliable reporting, and usually £500k turnover at minimum. Many lenders want £1m. |
Two things get listed everywhere and decide nothing. Recourse - whether you or the lender carries the loss if a customer fails - is a separate purchase called bad debt protection, available on both, so it cannot tell you which to pick. And both fund within 24 hours of a verified invoice, so speed is not a differentiator either.
£1.8m turnover · 14 contractors paid weekly · customers pay in 55 days · no credit controller · owner chases on Friday afternoons
Wages go out weekly, money comes in eight weeks later. The owner funds two months of payroll from his own reserves and spends Fridays on the phone instead of placing candidates.
Factoring, probably a specialist pay and bill facility. He cannot get discounting - there is no credit control function for a lender to underwrite. And he does not want to keep doing collections. The higher fee buys back the Friday afternoons, which makes it the cheaper option once you price his time.
£4.2m turnover · finance manager plus full-time credit controller · customers pay in 42 days · Sage reconciled weekly · largest customer is 45% of the ledger
Collections are already good. What the firm needs is working capital for a bigger contract, without its two major customers seeing a finance company on its invoices mid price negotiation.
Confidential invoice discounting. The credit control function and clean reporting are precisely what a discounting lender underwrites. The 45% concentration is the catch: expect funding against that debtor to be capped at 30% to 40% of the ledger, so the headline advance rate will not translate into the cash expected. Negotiate that cap harder than the margin.
People often search for factoring against invoice financing as if they were alternatives. Invoice financing is the umbrella term for the category; factoring and discounting are the two products inside it. Asking which is better is like asking whether you want a hatchback or a car.
There is a genuine third variant: selective or spot finance, where you fund individual invoices instead of assigning the whole ledger. It costs more per invoice but you only pay when you draw. It suits lumpy trading - a subcontractor with one large certified application a quarter - where a whole-ledger facility carrying a minimum monthly fee would be dead weight most of the year.
The product is half the answer. Rates on the same ledger vary by more than a percentage point between lenders, because each prices your sector and debtor concentration differently. Factor Now matches your ledger against the lenders that want it and shows their indicative terms side by side.
Compare lenders on your ledgerInvoice finance cost calculator - full breakdown including the fees lenders bury in the schedule.
Debtor days calculator - how your collection cycle compares to your sector.
