Invoice factoring and invoice discounting are popular methods for improving cash flow by advancing funds against unpaid invoices. However, it’s important to recognise they differ in key ways.
Invoice factoring
Invoice factoring involves selling invoices to a third-party finance company. The factor advances a portion of the invoice value (80-90%) and handles collections. Once paid, the factor releases the remaining amount, minus their fee. This method offers immediate cash flow and outsourced credit control but requires disclosing the arrangement to customers, which can affect relationships.
Invoice discounting
Invoice discounting allows businesses to borrow against invoices while retaining control over collections and customer interactions. The lender advances 70-90% of the invoice value and releases the remainder minus their fee when the customer pays. This approach maintains customer confidentiality but demands robust internal credit management.
Both methods improve cash flow, with invoice factoring providing immediate funds and outsourced collections, and invoice discounting offering privacy and control.
