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The fundamental operational difference
Under factoring, your company assigns invoices to the funder who then chases payment directly from your customers. Customers are aware of the arrangement and remit payment to the funder's account. The funder advances a percentage of the invoice value upfront and remits the balance (less fees) once collected.
Under invoice discounting the relationship with your customer is unchanged. Your company collects payment in the normal way, remits it to the funder's trust account, and the revolving facility is replenished. The funder's involvement is invisible to your customers.
Cost and eligibility differences
Factoring carries a service charge that covers the collections function — typically expressed as a percentage of turnover — on top of a discount charge on funds advanced. Discounting charges the discount rate on drawn balances only, with no service component, making it cheaper per pound advanced for companies with a well-run credit control function.
Discounting is generally reserved for companies with more established debtor books, stronger financial controls, and sufficient scale for the funder to rely on the company's own collections. Factoring is more accessible for younger companies or those without a dedicated credit control resource.
Customer relationship considerations
In sectors where customer relationships are sensitive — professional services, construction, specialist manufacturing — disclosed factoring can occasionally cause friction if customers associate the arrangement with financial difficulty, even though that perception is often unfounded. Confidential discounting eliminates this concern entirely.
For companies selling to large corporate or public sector buyers on standard payment terms, factoring is commonplace and carries no stigma.
Choosing between the two
- Do you have in-house credit control capable of managing collections consistently?
- Are your customers sensitive to third-party involvement in payment?
- Do you want to outsource debtor management as well as access cash?
- What is the average invoice value and debtor spread?
- What are the minimum turnover and debtor quality thresholds of your preferred funder?
Frequently asked questions
Can we switch from factoring to discounting as the company grows?
Yes — migrating to discounting as your credit control function matures is a common trajectory. You will need to demonstrate to the funder that your collections processes are robust enough to rely on, and you may need to notify customers that their payment instructions are reverting to your own account.
Does invoice finance affect our ability to take other forms of borrowing?
A factoring or discounting facility will include an assignment of debts in the security documentation, which means those receivables cannot simultaneously be used as security for another lender. Disclose all existing facilities when approaching any new lender.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.