Factoring vs invoice discounting: which fits your business?

Invoice factoring and invoice discounting are often spoken about as if they are interchangeable. They are not. Both fund you against unpaid B2B invoices, but the day-to-day reality of running each one inside a business is very different. Get the choice wrong and you will either pay too much in service fees or spend management time on credit control that you do not have.

What the two products share

At their core, both factoring and discounting do the same thing. You raise an invoice to a business customer. A lender advances the bulk of the value, typically between 85% and 95%, into your bank account the same working day. When your customer eventually pays, the balance is released to you, minus the lender's fees.

Both products price along similar lines too. A service fee, charged as a percentage of turnover, covers the lender's administration and risk. A discount fee, charged on funds actually drawn, covers the cost of the money itself. Both are usually quoted as a margin over the Bank of England base rate.

The single biggest difference: who chases payment

With invoice factoring, the lender takes over collections. Their credit-control team contacts your customers in the lender's own name, sends statements, chases overdue accounts and posts cash to the ledger. Your customers know there is a third-party funder involved, because they pay the lender directly.

With invoice discounting, you keep collections in-house. The lender stays invisible. Your customers continue to pay you, into a trust account controlled by the lender but presented in your name. As far as your customer is concerned, nothing has changed.

Discounting is almost always confidential. Factoring is almost always disclosed. That single fact drives almost every other difference between the two products.

Who qualifies for each

Lenders look at very different things depending on which product you are after.

• Factoring is broadly available from around £100k turnover. Lenders accept that you may not have a credit-control function, because they are providing one.
• Discounting typically starts around £500k turnover, and most lenders look for £750k to £1m before they will quote competitively. Underwriters want to see a credit controller in post, ledger reporting cycles, dispute logs and a clean DSO trend.

If your finance function is one person juggling AP, payroll and management accounts, factoring is the realistic option even if discounting looks cheaper on paper. The cost of doing collections badly is always higher than the cost of a service fee.

Pricing in practice

Indicative pricing in 2026 looks roughly like this:

• Factoring service fee: 0.5% to 3.0% of turnover, depending on volume, sector and risk.
• Discounting service fee: 0.2% to 1.0% of turnover, reflecting the fact that you are doing the credit control.
• Discount fee on drawn funds: Bank base plus 2% to 5%, broadly similar across both products.

On a £3m turnover business drawing an average of £400k, the total annual cost of factoring will typically land between £45,000 and £80,000, while discounting will land between £18,000 and £40,000. The discounting saving is real, but only if you actually have the credit-control function to support it.

A worked example

Take a UK recruitment agency turning over £3m, placing tech contractors on 45-day client terms. Weekly temp payroll is roughly £45,000. The directors are the only finance function.

On factoring, a specialist recruitment lender quotes 1.4% service fee and Bank base plus 3.0% on funds drawn. The lender handles all credit control, posts cash, manages timesheet reconciliation and bundles PAYE and pension payments into the weekly draw. Estimated total cost is around £62,000 a year. The directors get their weekends back.

On discounting, the same lender would price 0.45% service fee and Bank base plus 2.75%. Estimated total cost is around £32,000 a year, a saving of £30,000. But the agency would need to hire a credit controller, install a ledger reporting tool and pass quarterly audits. The fully-loaded cost of doing that comes in close to the £30,000 saving, and it requires the directors' time to manage.

For this agency, factoring is the right call until turnover is comfortably past £5m and a credit controller can be justified on their own. After that, switching to discounting is a sensible renewal-time conversation.

Other practical differences

Customer experience

With factoring, your customers will receive calls and statements from the lender. Most B2B buyers are entirely used to this and do not blink. Some sectors, particularly professional services and high-end consultancy, view it less favourably. If customer relationships are a differentiator for you, discounting protects them.

Selective options

Both products can be structured selectively, where you fund only the invoices you choose rather than committing the whole ledger. Selective factoring exists but is rarer. Selective discounting is more common and is increasingly popular with consultancies and agencies that only need funding on the occasional lumpy invoice.

Concentration and recourse

Both products handle debtor concentration the same way. If one customer is more than around 30% of your ledger, lenders will apply a concentration limit. Specialist lenders will price for it rather than refuse it. Both products are usually offered on a recourse basis as standard, with non-recourse (where the lender carries the bad-debt risk) available at higher fees.

How to decide

A simple test: if you already employ a credit controller and your customers ageing report is well-managed, discounting is almost certainly the better economics. If credit control is something you do badly on Friday afternoons, factoring buys you back the time and the discipline, and the higher fee is the price of both.

Either way, at renewal it is worth re-broking. The pricing gap between the cheapest and most expensive whole-of-market quote is wider than most directors think.