Cash flow is the lifeline of any business. When customers take 30, 60, or even 90 days to pay, it can place serious pressure on day-to-day operations. To ease that strain, many companies turn to two popular forms of invoice finance: invoice factoring and invoice discounting.
While both options help you turn unpaid invoices into immediate working capital, the way they work — and how much control you maintain — is very different. In this comprehensive guide, you’ll learn the exact difference between invoice factoring and discounting, how each method works, their pros and cons, and how to choose the right solution for your business.
Let’s dive in.
Invoice factoring is a type of financing where your business sells its unpaid invoices to a factoring company in exchange for immediate cash. This gives you quick access to working capital without waiting for customers to pay.
Here’s the basic process:
You provide goods or services to your customer.
You send the invoice to a factoring company.
The factoring company advances you 70%–90% of the invoice value.
They collect payment directly from your customer.
Once the customer pays in full, you get the remaining balance (minus fees).
The factoring company manages collections on your behalf.
Customers are aware that their invoice has been sold (this is called “notice factoring”).
Ideal for businesses with weak credit, since the lender focuses more on your customers’ creditworthiness.
Invoice discounting is a loan secured against your accounts receivable. Instead of selling your invoices, you use them as collateral while retaining full control over collections.
You invoice your customer as usual.
You borrow money against the value of that invoice (usually up to 80–95%).
You remain responsible for collecting payment.
Once the customer pays, you repay the lender plus fees.
No customer involvement — collections stay in-house.
Business retains complete confidentiality.
Ideal for companies with stronger internal credit controls and established financial processes.
Both methods unlock cash tied up in unpaid invoices, but the core difference lies in control, customer involvement, and responsibility.
| Feature | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Who collects payment? | Factoring company | Your business |
| Customer awareness | Customers are notified | Fully confidential |
| Ownership of invoices | Sold to the factor | Retained by the business |
| Best for | Businesses with weak credit or limited staff | Established businesses with strong credit |
| Cost | Typically higher | Typically lower |
| Risk | Assumed by factoring company (in non-recourse deals) | Kept by the business |
Assess cash-flow urgency.
Evaluate customer credit.
Review your internal collections process.
Decide on confidentiality needs.
Compare costs.
Check qualification requirements.
Choose the option that aligns with your operational capacity.
Understanding the advantages and disadvantages can help you determine whether factoring fits your business model.
Immediate cash flow relief for growing companies.
Factoring companies handle collections, saving time and resources.
Higher approval rates because lenders focus on customer credit, not yours.
Useful for businesses with long payment terms or inconsistent cash flow.
Helps stabilize finances during seasonal fluctuations.
Higher fees compared to discounting or traditional loans.
Customers are notified, which may affect business relationships.
You may lose some control over how collections are handled.
Not ideal for businesses that value privacy or have strong credit.
Invoice discounting gives businesses more control but also more responsibility.
Full confidentiality — customers never know you’re using finance.
Lower fees because your business handles collections.
You maintain strong customer relationships.
More flexibility in choosing which invoices to finance.
Excellent option for businesses with reliable accounting processes.
Requires a solid credit profile and established financial systems.
You must manage collections internally, which takes time and effort.
Lenders may impose stricter requirements due to added risk.
Not ideal for small or new businesses without robust cash-flow controls.
Small businesses often struggle with cash flow, making both factoring and discounting appealing. But the right choice depends on your structure and priorities.
Invoice factoring is often the better fit.
The factoring company manages collections, reducing administrative load.
Approval is easier for young businesses.
Invoice discounting can be more affordable.
If you can manage collections efficiently, you’ll save money.
Confidential financing protects customer relationships.
Factoring fees: 1%–5% of invoice value
Service charges
Possible additional fees for non-recourse factoring
Lower risk for you = higher cost
Discount rate/interest
Service/administration fee
Often cheaper overall due to retained risk
Factoring companies assume more risk, especially if they offer non-recourse factoring, where they absorb losses if customers fail to pay. Discounting keeps the risk with the business, which reduces lender exposure and cost.
Confidentiality often influences a company’s choice.
Customers receive a notice of assignment.
All payments go directly to the factor.
Some businesses worry this makes them appear financially unstable (though this is increasingly common).
Entirely private and internal.
Customers are unaware financing is being used.
Better for companies managing long-term relationships or large accounts.
The factoring company conducts credit checks, follows up on payments, and manages unpaid invoices.
You maintain full control over:
Payment reminders
Customer communication
Relationship management
Credit control
Factoring companies prioritize your customers’ creditworthiness, not your own. This makes factoring accessible for:
Startups
Small businesses
Companies with poor or limited credit history
Discounting providers look closely at:
Your financial records
Your internal credit control processes
Your trading history
Your business credit score
Established businesses usually qualify more easily.
Need immediate cash flow support
Have slow-paying customers
Lack the staff to manage collections
Want a quick approval process
Are comfortable with customers knowing about the financing
Want full confidentiality
Have strong credit and reliable customers
Prefer to keep control of payment collection
Want lower fees
Have the financial infrastructure to manage invoices internally
Staffing agencies
Transportation and logistics
Construction and subcontractors
Manufacturing
Wholesalers
Small retailers
These industries often deal with long payment terms and unpredictable customer timelines.
Large wholesalers
Distributors
Well-established manufacturers
Technology service providers
Corporations with long-term contracts
These businesses usually have stable financial operations and strong internal systems.
Factoring company bears credit risk.
You are protected if customers fail to pay (depending on contract).
You must repay the factor if a customer defaults.
You bear the full risk.
The lender only provides financing, not guarantees.
Startups often experience growing pains, especially around cash flow. Here's how the two compare:
Fast approval
Based on customer reliability
Helpful for quick scaling
Lower long-term cost
Keeps control internal
Works well once processes mature
Choosing between factoring and discounting requires a deeper understanding of your operations and goals.
Do I need help managing collections?
How important is customer confidentiality?
Is my business credit strong enough for discounting?
Are slow customer payments hurting my growth?
Do I have the administrative resources to track payments internally?
Am I looking for short-term relief or a long-term financing strategy?
Many successful companies use it to manage cash flow.
Factoring is widely accepted in industries with long billing cycles.
While best suited for established businesses, many small companies qualify as well.
Costs vary, but discounting can be comparable to traditional lending.
Here’s the simplest way to remember it:
Invoice factoring = Sell your invoices, get cash fast, factoring company collects payment.
Invoice discounting = Use invoices as collateral, get cash fast, you collect payment yourself.
Both unlock cash tied up in accounts receivable — they just differ in confidentiality, control, cost, and qualification requirements.
Understanding the difference between invoice factoring and discounting helps you make the right financial decision for long-term stability and growth. Each option serves a different type of business with different needs. Whether you want help with collections, need fast cash, or want to keep your financing confidential, there’s a solution that fits your goals.
If you’re ready to improve your business cash flow and explore the best financing options for your situation, reach out today for personalized guidance. The right financial strategy can fuel your next stage of growth — let’s make sure you choose the one that works best for you.