Factoring vs invoice discounting: which suits your business?
Both release cash from unpaid invoices. The difference is who chases your customers for payment, and whether those customers know a funder is involved.
By Chris Findlow · Updated October 2026
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The short answer
With factoring, the lender runs your credit control and collects payment from your customers, so they know a funder is involved. With invoice discounting, you keep collecting as you do now and, on a confidential facility, your customers need not know.
Factoring suits businesses that would value handing off the chasing. Discounting suits established businesses with solid credit control that want to keep the customer relationship in-house. Neither is better in the abstract.
Factoring vs discounting at a glance
The same funding, set up two different ways.
Scroll the table sideways to compare all three.
| Feature | Factoring | Discounting |
|---|---|---|
| Who manages credit control | The lender | You |
| Disclosed to your customers | Yes | No (confidential) |
| Typical advance rate | 80% to 90% | 80% to 100% |
| Service fee (check the charging basis) | 0.5% to 3% of turnover | 0.1% to 0.5% of turnover |
| Discount charge (interest, above BoE base) | 1.75% to 3.5% | 1.75% to 3.5% |
| Typical minimum annual turnover | £100,000+ | £250,000+ |
| Typical minimum contract | 3 to 12 months | 6 to 12 months |
| Best suited to | Smaller businesses without in-house credit control | Established businesses with strong sales ledger management |
Indicative ranges, not lender quotes. Actual terms depend on your turnover, customer credit quality and lender. Confirm which turnover or invoices a fee applies to, any minimum charge and the period covered.
How invoice factoring works
Factoring hands both the funding and the collections to the lender.
- You invoice your business customers on your usual 30, 60 or 90 day terms.
- The lender advances typically 80% to 90% of each invoice, often within 24 hours.
- The lender manages your sales ledger and chases your customers for payment.
- Your customer pays the lender directly.
- The lender pays you the balance, less its agreed fees.
Suits: smaller businesses, or those without in-house credit control, that would rather spend the time on the business than on chasing invoices. Factoring is more widely available at lower turnover, often from around £100,000 a year.
Trade-off: your customers deal with the funder for payment, and the service fee is higher because the lender is doing the collections work.
How invoice discounting works
Invoice discounting gives you the funding but leaves collections with you.
- You invoice your customers as normal.
- You report your invoices to the lender, which advances typically 80% to 90%, and up to 100% on some facilities.
- You run your own credit control and collect payment from your customers as normal.
- The lender releases the balance, less its agreed fees.
Most discounting facilities are confidential, which is why it is also called confidential invoice finance. Your customers see no change. Some lenders also offer CHOCS (Customer Handles Own Credit Service), where the facility is disclosed to customers but you still collect yourself.
Suits: established businesses with good systems and a reliable collections record, often from around £250,000 turnover. The lender is trusting you to keep collecting well, so it wants to see that you already do.
Trade-off: you keep the admin of chasing payment, and eligibility is stricter.
Recourse and non-recourse
This applies to both products and matters as much as the choice between them.
- Recourse. If a customer does not pay, you are liable and the lender reclaims the advance from you.
- Non-recourse, or bad debt protection. The lender absorbs the loss if a covered customer does not pay. It costs more, but it reduces your risk.
Confirm which you are being offered before you sign. Our answer on what happens if a customer doesn't pay covers this in more detail.
Which costs more?
Both carry the same two charges: a service fee for running the facility and a discount charge on the cash you draw.
The discount charge is similar for both, commonly 1.75% to 3.5% above Bank of England base rate. The service fee is where they part company. Confidential discounting sits around 0.1% to 0.5% of turnover because you do the collections. Factoring runs around 0.5% to 3% because the lender does.
So discounting is usually cheaper on paper, but only if you qualify for it and already have someone doing credit control well. If you would need to hire for that, factoring can work out better value. Compare the total cost of each facility, including any arrangement or minimum usage fees. Our guide to how much invoice finance costs breaks the charges down, and the invoice finance calculator shows what a facility could look like for your figures.
The third option: selective invoice finance
Factoring and discounting usually cover your whole sales ledger on a contract of several months. Selective invoice finance does not.
Selective invoice finance lets you fund individual invoices instead, usually pay-as-you-go with no minimum term and no minimum turnover. It can price higher per invoice than a whole-ledger facility, but it can suit a business with occasional large invoices, or one that wants to try invoice finance before committing.
How to choose
Factoring is probably the better fit if:
- you have no dedicated credit controller, or chasing payment eats into your week
- your turnover is below about £250,000
- you are comfortable with customers paying a funder
Discounting is probably the better fit if:
- you already run credit control well and can show it
- you want to keep the facility confidential
- you are established, with turnover above about £250,000
Which one a lender offers also depends on your sector, your customers and your trading history, so the answer is partly theirs to give. We put your profile in front of lenders that suit it and talk through which structure fits how you actually run your ledger.
Examples of funding we've arranged
Internal building works and maintenance
Confidential funding for facilities management contracts
£300k invoice discounting limit and £210k loan
The business needed invoice finance and a loan to fund facilities management contracts. Its customers preferred not to deal directly with an invoice finance company, so confidentiality mattered.
FundingLinks arranged a £300k confidential invoice discounting limit alongside a £210k loan. The business could fund its increased workload while keeping the invoice finance arrangement confidential.
These are individual cases. Available terms depend on the business, the assets or invoices involved, and the lender’s assessment.
Factoring and discounting FAQs
Is invoice discounting cheaper than factoring?
Usually, yes. The discount charge on the cash you draw is similar for both. The service fee is where they differ: confidential invoice discounting typically sits around 0.1% to 0.5% of turnover because you keep credit control, while factoring runs around 0.5% to 3% because the lender collects on your behalf. Compare the total cost of a facility, not one line.
Will my customers know if I use invoice discounting?
Not with a confidential facility. You invoice and collect exactly as before, so customers see no change. With factoring, the lender collects payment from your customers directly, so the facility is disclosed.
Can I switch from factoring to invoice discounting?
It can be possible as your business grows. Lenders tend to offer confidential discounting to established businesses with solid credit control, so a business that starts on factoring may qualify for discounting once its turnover and collections record are stronger. Check your current contract for its minimum term and notice period first.
What is CHOCS?
CHOCS stands for Customer Handles Own Credit Service. The facility is disclosed to your customers, as with factoring, but you keep credit control and collect payments yourself, as with discounting. Some lenders offer it as a middle option.
Which advances more, factoring or discounting?
Factoring typically advances 80% to 90% of the invoice value. Confidential invoice discounting typically advances 80% to 90% too, and can reach 100% on some facilities. The lender sets the rate based on your sector, your customers’ credit quality and your payment history.
Who can use factoring or invoice discounting?
Both are for businesses that invoice other businesses on credit terms. Consumer sales generally do not qualify. Factoring is more commonly available to smaller businesses, often from around £100,000 annual turnover. Discounting usually suits established businesses, often from around £250,000.
Written by
Chris Findlow
Director, FundingLinks
Director at FundingLinks with over 15 years across commercial lending, invoice finance and fintech partnerships, including senior leadership roles at Kriya. He works directly with SMEs to match them to the right lender across the whole market.
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