Factoring or invoice discounting: which one you are buying

The operational difference

Under factoring, the provider runs the sales ledger and collects from your customers, who are notified that invoices are payable to the facility. Under invoice discounting, you keep collections and the arrangement is normally confidential, so your customers deal only with you.

That is why factoring generally carries the higher service fee: you are buying a credit control department alongside the funding. For a small business without one, that can be the cheaper answer overall even at a higher headline rate.

Why providers care which you take

Discounting puts the provider further from the money. They are lending against a ledger collected by you, so they will want stronger reporting, a better debtor spread and usually a larger, more established business.

If you are offered factoring when you asked for discounting, that is a statement about how the provider sees your ledger rather than an upsell.

What your customers experience

Under factoring they receive a notice of assignment and pay a third party. Most large customers deal with this routinely; some smaller ones read it as distress. Whether that matters depends entirely on your market.

Ask to see the notice wording and the collections script before signing. You are letting somebody else speak to your customers in your name, and how they do it is worth more attention than a tenth of a percent on the fee.

Pricing them against each other

Run both through the calculator with their own service fees and the same turnover, debtor days and advance rate, then compare the total as a percentage of turnover.

Then add what you currently spend on credit control. If factoring removes a part-time credit controller, the comparison changes considerably, and that saving belongs in the arithmetic rather than in a feeling about the rate.