It is well documented that UK SMEs face a multitude of barriers in accessing finance.

While traditional lending from the high street banks has improved since the financial crisis, funding growth continues to be frustrating for SMEs. Official figures show that more than half of small business loan applications are rejected, making growth aspirations challenging and somewhat unachievable without a source of funding.

Invoice factoring and discounting are useful options for a range of business types. For instance, start-ups can benefit from flexible finance to get the new venture off the ground. High growth businesses can also benefit from investing their money straight back into the business as soon as invoices are issued. Finally, struggling business can ease cash flow problems by bridging the gap between invoicing customers and clients finally paying up.

Traditional funders have continually shown their reluctance to lend to small businesses owing to the lower profit margins and greater risk. Consequently, invoice factoring and discounting are stepping into the breach, becoming popular corporate finance options, but what are the key differences between the two?

What’s the Difference Between Invoice Factoring and Discounting?

Factoring and invoice discounting are both financial arrangements that can release the funds tied up in unpaid invoices. The invoice finance provider agrees to advances up to 100% of the value of outstanding customer invoices and then settles the balance or makes a second instalment when the customer settles their invoice, minus service fees. The essential difference between these two sub categories of invoice finance lies in who takes control of the sales ledger and is responsible for collecting payment.

Here are some of the key differences between invoice factoring and discounting.


Invoice factoring involves the funder dealing directly with customers for the collections process, so they will know that the business has an invoice finance arrangement in place. Some businesses may not want their customers to know they’re using this type of facility because it might make negotiating a good deal with suppliers tougher. Confidentiality can be an important reason why some businesses opt for invoice discounting.

In contrast, with invoice discounting sometimes known as “confidential invoice discounting” the business continues to manage the collections process in-house and deal with customers in the usual way. Therefore, customers are never aware that a funder is involved or that the business is using invoice finance as it may have cash flow problems.


Flexibility is an important consideration for directors when choosing between invoice factoring and discounting. With an invoice discounting facility, the funder typically requires the business to finance all outstanding invoices. This may not work for many businesses as they may prefer to finance specific invoices, which is much easier to do with factoring.


Smaller businesses that do not have a finance team can benefit hugely from the credit control services provided within a factoring agreement because this will free up time for time-strapped directors to focus on the business, rather than chasing late payments. However, that said, this additional service makes the facility more expensive than invoice discounting.

The Benefits of Invoice Factoring and Discounting

  • Settling supplier invoices promptly increases directors’ power to negotiate discounts
  • Facilities can be secured without assets
  • Releasing up to 100% of the value of your outstanding invoices within 24 hours
  • Working capital is injected into the business to overcome short-term cash flow problems or grow the business
  • The level of funding available is flexible and can increase in line with  business revenue

In broad terms, choosing between invoice factoring and discounting will depend on the size of a business and its turnover whether credit control is required or whether the facility should remain confidential or not. If you’re considering invoice factoring and discounting, why not speak to an impartial expert on 08000 746 757 or email for free and confidential advice from one of our professional advisers.