Factoring vs. Invoice Discounting: What’s the Difference?

What exactly is the difference between factoring and invoice discounting? And which one’s right for your business? As companies explore the growing world of alternative financing and fintech, these are both increasingly common questions.

Factoring and invoice discounting both involve a company advancing you some percentage of an outstanding invoice. They’re both also examples of ways to jumpstart your accounts receivable and quickly reinvest those funds.

But there are some important differences you have to understand before using either factoring or invoice discounting. Let’s explore these methods in detail, to see what’s the same and what’s different.

The Similarities: Time Frame, General Process
Since both factoring and invoice discounting are invoice-based financing strategies, they look a lot alike, especially in the following ways:

Amount of Money and Time:
Both release somewhere between 70% and 90% of the value of an outstanding invoice within 24–48 hours. This is in contrast to the 30–60 days it takes for most invoices to be payed.
Financial Considerations: Neither require provable assets or company credit checks. They’re only concerned with the reliability and credit rating of the company which owes the invoice.
Reward Good Customer Relationships: Invoices being paid on time again and again will earn you better rates by proving the reliability of your customers. So, both tools reward taking time to develop relationships.
The Main Difference: Who’s Collecting Payment

While the main process is the same with both factoring and invoice-discounting, there’s one important difference — who collects payment from your customers. Let’s unpack this and see the benefits and cons of each method:

Factoring Payment Collection

A factoring company takes over collecting the invoice entirely. You don’t have to deal with the company which owes you the invoice at all after the initial transaction. This has advantages and disadvantages. On the one hand, the companies which owe you invoices may think you’re having cash flow problems. Whether this is true or not, you usually want to avoid creating this impression.

On the other hand, if you’re expanding your business overseas, factoring can save you a lot of headaches. The factoring company will deal directly with foreign clients, saving you a lot of time, money, and hassle. If you’re looking to develop long-term relationships, this might not be your cup of tea, but for something more short-term it’s a great option.

Invoice Discounting Payment Collection

With invoice financing, by contrast, you’re still the main actor. Your company is responsible for collecting the invoice and paying off the invoice financing company. This means that while you’ll have to put in the time and resources to contact your clients and collect payment yourself (which might increase your costs), you get to keep total control of your customer relationships.

With invoice financing, whoever owes the invoice will likely have no idea that you’ve gotten an advance on it. You avoid creating a (possibly) bad impression, so this is your best option if your main concern is ensuring discretion.

How Should You Make Your Decision?
Both factoring and invoice financing work better for companies in industries which deal with large bulk sales. Getting an advance on thousands of smaller payments is simply inefficient because of the many fees, which add up, and the time it requires, whereas getting an advance on a single large payment helps you get more money more easily.

For this reason, the most common industries which use one of these financing techniques are manufacturers, wholesalers, and construction.

If your business fits the right category, and so do your clients, the next set of questions to ask yourself are:

Is your business experiencing cash flow problems?
Would your business benefit a lot from being able to reinvest capital one to two months ahead of schedule? In other words, are you aiming for faster growth and willing to use factoring or invoice financing to reinvest immediately?
Does your business need greater flexibility? Sometimes a new business opportunity may appear when you’re not ready to invest the money required to take advantage of it. Factoring and invoice financing can help you have more flexibility.
If you think your business could benefit from using factoring or invoice discounting, the last piece of the puzzle is finding the right financing company.

The Right Factoring or Invoice Discounting Partner

It’s essential to find a financing partner you can trust. Make sure you look for case studies, recommendations, and other signs that you’re working with a verified, secure company.

Have you used either of these services before? What was your experience like and how may they have helped your company? We’d love to hear about it in the comments.