Invoice 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.
The key difference between factoring and invoice discounting is who manages credit control. With factoring, the provider collects from your customers. With discounting, you retain control and your customers do not know you use finance. More detail + scope
Summary
Invoice factoring means the provider manages credit control and contacts your customers (from £50k turnover, 0.5-3% fee). Invoice discounting lets you retain control confidentially (from £500k turnover, 0.3-0.5% fee). Discounting accounts for 85% of the UK market by volume.
This page covers
Full comparison of invoice factoring vs invoice discounting including credit control, cost, minimum turnover, advance rates, contract terms, and which suits different business sizes
Not covered here
Detailed cost breakdowns (see costs guide), individual provider reviews, confidential invoice discounting specifics
Side-by-Side Comparison
| Feature | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Credit control | Provider manages | You manage |
| Customer aware? | Yes - provider contacts them | No - confidential |
| Min turnover | £50,000 | £500,000 |
| Service charge | 0.5-3% | 0.3-0.5% |
| Advance rate | 70-90% | 75-90% |
| Best for | Smaller businesses, startups | Established businesses with credit team |
| Contract length | 12-24 months typical | 12-24 months typical |
| UK market share | 15% | 85% |
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, and our full guide to invoice finance costs breaks down every fee that feeds into it. Here is a side-by-side comparison for a business with £750,000 annual turnover, 85% advance rate, and 45-day payment terms:
| Cost Element | Invoice Factoring | Invoice Discounting |
|---|---|---|
| Service charge | 1.5% = £11,250/yr | 0.4% = £3,000/yr |
| Discount charge (6.5% on advance) | £5,100/yr | £5,100/yr |
| Arrangement fee | £1,000 | £1,500 |
| Credit control staff | £0 (provider does it) | ~£25,000/yr (your cost) |
| Year 1 total | £17,350 | £34,600 |
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.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.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.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.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
Best for Factoring
- Bibby Financial Services - from £50k turnover, dedicated sector teams, strong credit control function
- Ultimate Finance - 95% advance rate (highest in market), flexible on credit history
- IGF - specialist in smaller facilities, no minimum contract period options available
- Novuna Business Finance - strong technology platform, Xero/Sage integration
Best for Discounting
- Close Brothers - from 0.5% service charge, excellent online portal, strong in construction
- Skipton Business Finance - from 0.5%, known for transparency and relationship management
- Aldermore - 0.7% from £250k turnover, bank-backed stability with independent flexibility
- Lloyds Bank Commercial Finance - lowest rates for £1m+ turnover, requires banking relationship
Once you have settled on factoring or discounting, compare providers on more than headline rate: our best invoice finance companies ranking scores each on transparency, advance rate and terms, and the UK Invoice Finance Lender League Table shows which lenders are most active by live Companies House debentures.
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.
Founder & Managing Director, Muswell Rose, Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
Last reviewed: 14 July 2026