Invoice Factoring vs. Invoice Discounting: What’s the Difference?

If your business struggles with long payment cycles, slow-paying customers, or unpredictable cash flow, you’ve likely come across two popular financing tools: invoice factoring and invoice discounting. Both help companies unlock the cash tied up in unpaid invoices — but they work very differently.

This guide breaks down the difference between invoice factoring and discounting in clear, simple terms. We’ll cover how each works, the pros and cons, costs, risks, and which businesses benefit most. You’ll also find lists, charts, examples, and a short featured-snippet-optimized section for quick answers.

Whether you’re a small business owner or financial decision-maker, this article will help you decide which working capital solution fits your needs — and how Crestmont Capital can help you secure the right funding.

What Is the Difference Between Invoice Factoring and Invoice Discounting? 

Invoice factoring involves selling your invoices to a factoring company, which then collects payments from your customers directly. In contrast, invoice discounting keeps collections in your hands — you use invoices as collateral for a loan and repay the lender once customers pay.

Here’s the simplest way to remember it:

• Factoring = You outsource collections.

• Discounting = You keep control of collections.

But the full story is more nuanced. Let’s dive deeper.

Understanding Invoice Factoring

How Invoice Factoring Works

Invoice factoring is a financing method where your business sells outstanding invoices to a factoring company at a discount. You receive a large portion of the invoice value upfront — usually 70% to 90% — and the factor takes over the task of collecting payment.

Step-by-Step: How Invoice Factoring Works

1. You deliver goods or services to your customer.

2. You issue an invoice payable in 30–90 days.

3. You sell the invoice to a factoring company.

4. The factor advances part of the invoice value.

5. The factor collects directly from your customer.

6. When paid, you receive the remaining balance minus fees.

Best for Businesses That:

• Have slow-paying customers

• Want to outsource collections

• Have weaker credit but strong customer credit

• Need predictable cash flow quickly

• Prefer not to take on debt

Advantages of Invoice Factoring

• Immediate cash flow — no need to wait 30–90 days

• Factoring company handles collections

• Approval is based on customer creditworthiness, not yours

• Useful for startups and small businesses with limited credit history

• Can grow with your sales volume

Drawbacks of Invoice Factoring

• Higher fees compared to discounting

• Customers know a factoring company is involved (non-confidential)

• Less control over the customer relationship

• Not ideal if your industry expects you to manage collections internally

Understanding Invoice Discounting

How Invoice Discounting Works

Invoice discounting is a financing arrangement where your unpaid invoices are used as collateral for a loan or line of credit. Unlike factoring, you retain full control of collections and your customers do not interact with the lender.

Step-by-Step: How Invoice Discounting Works

1. You invoice your customers as usual.

2. You submit invoices to the lender.

3. The lender advances a percentage of the invoice value.

4. You collect payment from your customers.

5. You repay the lender plus any fees once invoices are paid.

Best for Businesses That:

• Have strong internal accounting systems

• Want to keep financing confidential

• Have good credit and reliable customers

• Prefer to maintain control of customer communication

• Need lower-cost financing

Advantages of Invoice Discounting

• Lower fees compared to factoring

• Completely confidential

• You maintain customer relationships

• More control over credit management

• Flexible and scalable

Drawbacks of Invoice Discounting

• Requires strong credit and solid financials

• You must manage collections effectively

• Lenders may approve lower advance rates

• Not always available to early-stage businesses

Invoice Factoring vs. Invoice Discounting: Side-by-Side Comparison

Key Differences at a Glance

When to Choose Invoice Factoring

Invoice factoring is the better choice when:

• You need cash immediately

• Your customers have strong credit but pay slowly

• You have a small accounting team

• You prefer the factoring company to handle collections

• You want a financing option that doesn’t show up as debt

Industries That Commonly Use Factoring

• Transportation and trucking

• Staffing agencies

• Manufacturing

• Wholesale and distribution

• Construction subcontractors

• Government contracting

When to Choose Invoice Discounting

Invoice discounting is ideal if:

• You can manage collections internally

• Your business has strong financials

• You want funding to be confidential

• You prefer lower fees and costs

• You want more control over customer interactions

Industries That Benefit From Discounting

• Professional services

• Large wholesalers

• IT and tech consulting firms

• Marketing agencies

• Manufacturing companies with stable clients

What’s the Main Difference Between Invoice Factoring and Discounting?

1. Factoring sells invoices.

2. Discounting uses invoices as collateral.

3. Factoring outsources collections.

4. Discounting keeps collections in-house.

5. Factoring notifies customers.

6. Discounting stays confidential.

7. Factoring costs more

Pros and Cons: Invoice Factoring vs. Invoice Discounting

Pros of Invoice Factoring

• Fast access to working capital

• No added debt

• Less administrative burden

• Better for small or growing businesses

• Approval focuses on customer creditworthiness

Cons of Invoice Factoring

• Higher fees

• Customers may perceive factoring differently

• Less control over collections

Pros of Invoice Discounting

• Lower costs

• Full confidentiality

• Maintains strong customer relationships

• Ideal for established businesses with predictable sales

Cons of Invoice Discounting

• More responsibility for collections

• Requires good credit

• May require financial statements or audits

Cost Differences Between Factoring and Discounting

Understanding costs is essential when evaluating invoice factoring vs. invoice discounting.

Cost of Invoice Factoring

• Factoring fees: 1%–5% per month

• Additional charges: credit checks, lockbox services, verification fees

• Advance rates: Up to 90%

Because factoring companies take on more risk, the cost is higher.

Cost of Invoice Discounting

• Discount rates: 0.5%–3% per month

• Service fees: Often lower or optional

• Advance rates: 60%–85%

Discounting is cheaper because you’re responsible for collections.

Impact on Customer Relationships

The difference between invoice factoring and discounting becomes especially important when you consider customer communication.

With Factoring:

• Customers interact with the factoring company.

• They send their payments to the factor directly.

• Some customers may ask questions or feel uncertain.

With Discounting:

• Customers never know financing is involved.

• You manage the entire process internally.

• This allows you to maintain rapport and communication quality.

Risk Considerations: Which Is Safer?

Factoring Risk

The factoring company generally takes on:

• Payment collection

• Customer credit checks

• Non-payment risk (depending on recourse vs non-recourse factoring)

Discounting Risk

You take full responsibility for:

• Customer non-payment

• Late payments

• Collection delays

Discounting tends to carry more internal risk unless you have rock-solid customers.

Who Should Not Use Factoring or Discounting?

Not every business is a fit for receivables financing.

Factoring may not be ideal if:

• Your customers expect direct communication only from you

• You prioritize confidentiality

• You have very low margins

Discounting may not be ideal if:

• You have weak credit

• Your customers pay inconsistently

• Your accounting team is small or inexperienced

Real-World Example: Factoring vs. Discounting

Scenario: A Small Manufacturing Company

• Factoring: The company receives 85% upfront from a factor who handles all collections.

• Discounting: The company borrows against invoices, collects from customers, and repays the lender later.

Outcome:

• If they value speed and simplicity → Factoring is better

• If they have a strong finance team and want lower costs → Discounting is better

Choosing Between Factoring and Discounting: Expert Recommendations

When deciding between invoice factoring and invoice discounting, consider:

• How quickly do you need cash?

• Do you want to manage collections?

• How important is confidentiality?

• What is your credit profile?

• How much flexibility do you need?

If your business is smaller, growing fast, or struggling with late-paying customers, factoring may provide more advantages. Meanwhile, mature businesses with strong internal systems often prefer the lower cost of discounting.

Conclusion: Factoring vs. Discounting — Which Is Best for Your Business?

The key difference between invoice factoring and discounting comes down to control, confidentiality, and cost. Factoring gives you fast access to cash and takes collections off your plate, while discounting keeps the process in-house and offers lower fees.

Both are valuable tools for improving cash flow — and the right choice depends on your business size, customers, creditworthiness, and internal resources.

Ready to Improve Cash Flow? Crestmont Capital Can Help

If you’re exploring invoice factoring or invoice discounting, Crestmont Capital can help you compare options, secure competitive rates, and choose the right financing solution for your business.

Disclaimer:
The information provided in this article is for general educational purposes only and is not financial, legal, or tax advice. Funding terms, qualifications, and product availability may vary and are subject to change without notice. Crestmont Capital does not guarantee approval, rates, or specific outcomes. For personalized information about your business funding options, contact our team directly.