Invoice factoring vs. invoice discounting: What's the difference?

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Page written by Ashlyn Brooks. Last reviewed on October 9, 2024. Next review due October 1, 2025.

When businesses need to improve cash flow, two common solutions are invoice factoring and invoice discounting. While both options allow companies to access the funds tied up in unpaid invoices, they operate in distinct ways. This guide will explain the difference between factoring and discounting, helping you decide which option best suits your business needs.

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What is invoice factoring?

Invoice factoring involves selling your unpaid invoices to a third-party company (called a factor) at a discounted rate. In exchange, the factor provides your business with a significant portion of the invoice’s value upfront, typically 70-90%. The factor then assumes responsibility for collecting payment from your customers. Once the customer pays the invoice, the factor will give you the remaining balance minus their fees.

Invoice factoring is ideal for businesses that need quick access to cash and want to offload the burden of managing collections. However, since the factor interacts directly with your customers, it can impact customer relationships if you’re not careful.

What is invoice discounting?

Invoice discounting, on the other hand, allows businesses to borrow money against their unpaid invoices while retaining control over collections. In this scenario, the lender provides a loan or line of credit based on the value of your outstanding invoices, but you remain responsible for chasing payments from your customers. Once the invoices are paid, you repay the lender the amount borrowed plus any applicable fees or interest.

This option is more discreet than factoring, as customers are unaware of the arrangement. It’s a great solution for businesses that want to maintain direct relationships with their clients and manage their own accounts receivable.

Which is best: invoice factoring vs. invoice discounting?

Invoice factoring is best for businesses that need quick cash and want to outsource collections, while invoice discounting is ideal if you prefer to retain control of customer relationships and manage collections internally.

Here’s a full breakdown of what factors should guide your choice:

Control of Collections: If you prefer to maintain control over your customer relationships and manage collections, invoice discounting is the better choice. However, if you’d rather outsource collections and free up time and resources, invoice factoring may be more suitable.
Customer Interaction: In invoice factoring, the factor contacts your customers directly, which could affect how clients perceive your business. With invoice discounting, customers remain unaware of the financing arrangement, allowing you to preserve your professional relationships.
Cost Structure: Factoring fees tend to be higher due to the additional service of managing collections while discounting typically involves lower costs but requires you to handle payment collection.
Business Needs: For companies facing a significant cash crunch and wanting to streamline operations, invoice factoring offers quick access to funds and simplifies collections. Businesses that prioritize discretion and customer relations may prefer invoice discounting.

Factor	Invoice factoring	Invoice discounting
Control of collections	Outsource collections to a third-party factor	Business retains control over collections
Customer interaction	Factor contacts customers directly, potentially impacting relationships	Customers are unaware of the financing arrangement
Cost structure	Higher fees due to outsourced collections	Lower costs, but business handles payment collections
Business needs	Ideal for businesses needing quick cash and simplified operations	Best for businesses wanting to maintain customer relationships and discretion

How Swoop can help

At Swoop, we understand that every business has unique cash flow requirements. Whether you’re looking for invoice factoring to speed up your access to cash or invoice discounting to maintain control over your receivables, Swoop can guide you to the right solution. Our platform allows you to explore and compare funding options tailored to your specific needs.

To discover which option is best for your business and get personalized recommendations, register now.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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