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invoice finance, small business

Invoice factoring vs invoice discounting - which is right for your business?

Capitalise Apr 28, 2023

For many businesses, managing cashflow can be a challenge. One way to alleviate some of the pressure is through invoice finance, a type of business loan that allows businesses to access funds that are tied up in unpaid invoices. 

There are different types of invoice finance, including invoice factoring and invoice discounting,  

We explore the differences between the two to help you determine which one is the right fit for your business.

What is invoice factoring?

Invoice factoring is a type of invoice finance that allows businesses to borrow against their customer invoices to speed up their cashflow and receive the invoice payment immediately, rather than waiting for weeks to be paid. 

With an invoice factoring loan, the lender will advance a percentage of the invoice to the business (typically around 80-90%). The lender will then collect payment from the customer, taking a fee for the service 

Invoice factoring a lower risk type of invoice finance from the lender’s perspective. This is because the lender has the control over ensuring your customer pays the invoice on time. So this type of invoice finance can be more suitable for companies that have a short trading history or lower turnover. 

What is invoice discounting?

Invoice discounting is similar to invoice factoring in that it allows businesses to access funds that are tied up in unpaid invoices. However, the key difference is that the business retains ownership of the invoices and is responsible for collecting payment from the customer. 

Which one is right for your business?

The decision between invoice factoring and invoice discounting will depend on a number of factors specific to your business. 

Here are a few key considerations to keep in mind:

Control over customer relationships

If maintaining control over customer relationships is important to your business, then invoice discounting may be the better option. With invoice factoring, the lender is responsible for collecting payment from your customers, which may not align with your business's values or goals.


Creditworthiness of your customers

If your customers have a poor credit history or are slow to pay invoices, then invoice factoring may be the better option. Factoring lenders typically take on the risk of non-payment, which can be a valuable service for businesses with unreliable customers.

Tip: You can check the credit history of your customers with Capitalise for Business to see if they historically pay on time. 



Both invoice factoring and invoice discounting come with fees, but the specific costs will vary depending on the provider and the terms of the agreement. It's important to carefully consider the costs associated with each option and determine which one is the most cost-effective for your business.


Size of your business

Invoice factoring may be a better fit for smaller businesses that don't have a dedicated finance team, or the resources to manage collections on their own. Invoice discounting may be a better fit for larger businesses with more established financial processes and systems in place.


Invoice factoring and invoice discounting are both valuable financing options for businesses looking to improve cashflow. The decision between the two will depend on a number of factors specific to your business, including your control over customer relationships, the creditworthiness of your customers, the cost, and the size of your business. 


If you’re unsure which option is best for your business, you can speak with one of our  Funding Specialists who will help you to find the right lender and right option for your business.


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