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.
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.
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.
You deliver goods or services to your customer.
You issue an invoice payable in 30–90 days.
You sell the invoice to a factoring company.
The factor advances part of the invoice value.
The factor collects directly from your customer.
When paid, you receive the remaining balance minus fees.
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
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
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
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.
You invoice your customers as usual.
You submit invoices to the lender.
The lender advances a percentage of the invoice value.
You collect payment from your customers.
You repay the lender plus any fees once invoices are paid.
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
Lower fees compared to factoring
Completely confidential
You maintain customer relationships
More control over credit management
Flexible and scalable
Requires strong credit and solid financials
You must manage collections effectively
Lenders may approve lower advance rates
Not always available to early-stage businesses
| Feature | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Control of Collections | Factoring company | Your business |
| Customer Involvement | Customers are notified | Confidential |
| Cost | Higher fees | Lower fees |
| Who Qualifies | Weaker credit acceptable | Stronger credit needed |
| Advance Rates | 70–90% | 60–85% |
| Debt on Balance Sheet? | No | Yes |
| Best For | Small, growing, cash-strained businesses | Established companies with good credit |
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
Transportation and trucking
Staffing agencies
Manufacturing
Wholesale and distribution
Construction subcontractors
Government contracting
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
Professional services
Large wholesalers
IT and tech consulting firms
Marketing agencies
Manufacturing companies with stable clients
Factoring sells invoices.
Discounting uses invoices as collateral.
Factoring outsources collections.
Discounting keeps collections in-house.
Factoring notifies customers.
Discounting stays confidential.
Factoring costs more
Fast access to working capital
No added debt
Less administrative burden
Better for small or growing businesses
Approval focuses on customer creditworthiness
Higher fees
Customers may perceive factoring differently
Less control over collections
Lower costs
Full confidentiality
Maintains strong customer relationships
Ideal for established businesses with predictable sales
More responsibility for collections
Requires good credit
May require financial statements or audits
Understanding costs is essential when evaluating invoice factoring vs. invoice discounting.
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.
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.
The difference between invoice factoring and discounting becomes especially important when you consider customer communication.
Customers interact with the factoring company.
They send their payments to the factor directly.
Some customers may ask questions or feel uncertain.
Customers never know financing is involved.
You manage the entire process internally.
This allows you to maintain rapport and communication quality.
The factoring company generally takes on:
Payment collection
Customer credit checks
Non-payment risk (depending on recourse vs non-recourse factoring)
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.
Not every business is a fit for receivables financing.
Your customers expect direct communication only from you
You prioritize confidentiality
You have very low margins
You have weak credit
Your customers pay inconsistently
Your accounting team is small or inexperienced
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.
If they value speed and simplicity → Factoring is better
If they have a strong finance team and want lower costs → Discounting is better
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.
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.
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.