Factoring vs Invoice Discounting

The main difference between invoice factoring and invoice discounting is who manages credit control. With factoring, the finance provider collects payment from your customers directly. With invoice discounting, you retain full control of collections and your customers typically do not know you use finance. Factoring suits smaller businesses (£50k+ turnover) while discounting is usually available from £500,000 turnover.

Side-by-Side Comparison

When to Choose Factoring

• Your turnover is below £500,000
• You don't have a dedicated credit control function
• You want help chasing late-paying customers
• You're a startup or early-stage business

When to Choose Discounting

• Your turnover exceeds £500,000
• You want your customers to remain unaware of your financing
• You have established credit control processes
• You want the lowest possible cost

Real-World Cost Comparison

The cost difference between factoring and discounting is significant. Here is a side-by-side comparison for a business with £750,000 annual turnover, 85% advance rate, and 45-day payment terms:

On paper, discounting looks more expensive because of the credit control salary. But if you already have a credit controller (or the business owner handles collections), that cost is already being paid. In that scenario, discounting saves £8,250 per year in service charges alone. This is why discounting dominates the market - 85% of UK invoice finance by volume is discounting, according to UK Finance.

Transitioning from Factoring to Discounting

Many businesses start with factoring and graduate to discounting as they grow. The transition typically happens when your turnover reaches £500,000+ and you have demonstrated consistent credit control. Here is what the transition looks like:

1. 1.Annual review meeting: At your facility review (usually 12 months in), raise the transition with your provider. Most have a defined pathway from factoring to discounting.
2. 2.Credit control audit: The provider will assess your debtor book quality, aged debt profile, and collection processes. They want to see that fewer than 5% of invoices go past 90 days.
3. 3.Trial period: Some providers offer a 3-month "shadow" period where you manage collections while they monitor. If the debtor book performs well, the transition becomes permanent.
4. 4.New terms: Expect your service charge to drop from 1-3% to 0.3-0.5%. Your contract may be extended by 12 months as part of the new agreement.

Provider Recommendations by Type

Recourse vs Non-Recourse: An Additional Choice

Within both factoring and discounting, you also choose between recourse and non-recourse arrangements. With recourse, you are liable if your customer does not pay - the provider will "recourse" the invoice back to you, typically after 90 days. With non-recourse, the provider absorbs the bad debt risk, but charges more (typically 0.3-1.5% extra for bad debt protection).

Most UK facilities are recourse. Non-recourse is more common in export factoring where the risk of overseas debtor default is higher. For a detailed comparison, see our recourse vs non-recourse guide.

Market Trends: The Shift Toward Selective and Spot Factoring

Traditional factoring and discounting require you to assign your entire debtor book. A growing segment of the UK market now offers selective invoice finance - where you choose which individual invoices to fund. This is sometimes called spot factoring or single invoice finance.

Selective facilities typically cost more per invoice (2-5% vs 0.5-3%) but have no long-term contract and no minimum volume. They suit businesses that only need occasional cash flow support or want to fund a specific large invoice without committing to a full facility. See our selective invoice finance guide for providers and pricing.