Factoring or discounting? The distinction that actually matters

Invoice factoring and invoice discounting are often described as if they were two different products. In practice they are two ways of structuring the same idea: a provider advances a proportion of the value of eligible invoices before the customer pays.

What separates them is not the funding. It is the operating model that sits around it.

What they have in common

Under either structure, the business raises invoices to its customers as normal. Eligible invoices are notified to the provider, which makes an agreed proportion of their value available. When the customer pays, the balance, less fees, is released. The facility rolls forward as new invoices are raised.

Advance rates, fees and eligibility criteria vary between providers and facilities regardless of which structure is used.

Factoring: the provider supports collections

With factoring, the provider commonly takes on the management of the sales ledger and the collection of invoices. Customers are usually notified of the arrangement and asked to pay the provider directly.

For a business without a dedicated credit control function, this can be a genuine relief. Chasing invoices is work, and in smaller businesses it is often being done by the person who should be winning the next order.

Discounting: the business keeps control

With discounting, the business continues to run its own ledger and chase its own invoices. Funding is drawn against the ledger in the background. Depending on the provider and the structure, the facility may be confidential, so customers see no change.

Because the business is keeping the ledger, providers generally want evidence that it can run it well. Reporting requirements are usually more involved than under a factoring facility.

The confidentiality question

Whether it matters that customers know depends heavily on sector. In recruitment, haulage and several other industries, invoice finance is common enough that a notice of assignment on an invoice is unremarkable. In others it may prompt questions.

It is worth being precise here: confidential facilities exist, but they are offered at the provider’s discretion and are not guaranteed. Treat confidentiality as something to explore rather than something to assume.

Which tends to suit which business

• Factoring is often considered by smaller or growing businesses, businesses without in-house credit control, and businesses in sectors where disclosed facilities are normal.
• Discounting is often considered by more established businesses with a reliable ledger process, and by businesses that would prefer customers to see no change.
• Plenty of businesses sit in between, which is where a proper conversation about the ledger, the customers and the controls earns its keep.

Neither structure is better. The right one depends on how the business runs, how it wants customers to experience it, and what providers are willing to offer.

This article is general information about how invoice finance facilities commonly operate. It is not advice, and facility terms vary between providers. Speak to Haslam Consult about your own circumstances.