Invoice finance is the umbrella term for borrowing against or selling unpaid invoices. Under it sit two main products. With invoice factoring the provider advances funds and also runs your sales ledger, collecting payment from customers who are told about the arrangement. With invoice discounting the provider advances funds only; you keep collecting, and customers usually never know. The funding mechanics are almost identical. The service, the disclosure and the eligibility are not.
The two products side by side
Invoice factoring
- Advance of an agreed percentage of each invoice, often 70% to 90%.
- Provider runs credit control: statements, reminders, calls, collection.
- Usually disclosed: invoices carry an assignment notice and customers pay the provider.
- Higher service fee, roughly 0.75% to 3% of turnover, covering collections.
- Open to smaller and younger businesses, often from £50k to £250k turnover.
- Also called debt factoring.
Invoice discounting
- Advance of an agreed percentage of the ledger, often 70% to 90%.
- You keep credit control and collect payment yourself.
- Usually confidential: customers pay a trust account in your name.
- Lower service fee, roughly 0.2% to 1% of turnover, because you do the work.
- Generally for established businesses, often £500k+ turnover, with proven credit control.
- Confidential version often shortened to CID.
Is debt factoring different from invoice factoring?
No. Debt factoring and invoice factoring are the same product under two names. "Debt factoring" is the term used in accountancy and business-studies syllabuses, where the invoices are "debts" being "factored". "Invoice factoring" is what almost every UK provider calls it. So "debt factoring vs invoice discounting" and "invoice factoring vs invoice discounting" are the same question, and this page answers both. Our debt factoring guide covers the terminology in more depth.
Credit control: the work of making sure customers pay on time: sending statements, chasing overdue invoices, handling queries and escalating if necessary. Who does this work is the single biggest practical difference between the two products.
Detailed comparison
| Factor | Invoice factoring | Invoice discounting |
|---|---|---|
| Credit control | Provider's team chases and collects. | You chase and collect; the provider monitors and may audit your ledger. |
| Disclosure | Usually disclosed. Customers pay the provider's account. | Usually confidential. Customers pay a trust account in your name. |
| Eligibility | Minimum turnover often £50k to £250k. Start-ups and businesses with weak credit control can qualify. | Often £500k+ turnover, two years' accounts, effective credit control, reliable systems and a spread of customers. |
| Service fee | Roughly 0.75% to 3% of invoice value or turnover. | Roughly 0.2% to 1% of turnover. |
| Discount charge | Roughly 1.5% to 5% a year over base rate or SONIA on funds drawn. | Broadly the same range; sometimes slightly lower for larger facilities. |
| Administration | Low. Submit invoices; the provider reconciles, chases and reports. | Higher. Upload ledger movements regularly, reconcile cash, maintain the credit control function. |
| Customer relationships | A third party contacts your customers about payment. | Nothing changes for customers; tough conversations about payment stay with you. |
| Bad debt risk | Recourse or non-recourse widely available. | Usually recourse; bad debt protection can be added. |
| Typical business | Smaller or growing, no credit controller, many customers: recruitment, haulage, cleaning, small manufacturers. | Established, with a finance function and often £1m+ turnover: wholesalers, larger manufacturers, consultancies. |
Choose factoring if, choose invoice discounting if
Choose invoice factoring if
- You have no credit control function, or the person doing it is also running the business.
- Your turnover is below roughly £500k, or you have traded for less than two years.
- You have many customers and chasing them all is a real cost in time.
- Your customers are large organisations that routinely pay factors.
- You want non-recourse protection, which is more readily available with factoring.
Choose invoice discounting if
- You already run effective credit control and your debtor days are under control.
- Your turnover is comfortably above £500k and you have a finance team.
- Keeping the arrangement confidential matters to you or your customers.
- You want the lowest service fee and are happy to do the work that earns it.
- Customer relationships are commercially sensitive and you want them handled in-house.
CHOCS: the middle option
Not every business fits one column. A business might have decent credit control but not the turnover or history a provider wants for confidential discounting. For that situation some providers offer CHOCS, Client Handles Own Collections: a disclosed facility, so customers are notified and pay the provider's account, but you continue to chase and collect. The service fee sits between factoring and discounting, and it is often a stepping stone: demonstrate that collections are run well, then move to confidential discounting once the provider is satisfied.
Still not sure which column you sit in?
Tell us about your turnover, customers and how collections are handled today, and we will explain which product providers are likely to consider.
Cost comparison example
The example runs the same business through both products. It assumes £1.2m annual turnover (£100,000 of invoices a month), customers paying on average 50 days after invoice, an 85% advance rate under either product, a service fee of 1.5% for factoring and 0.5% for discounting, and a discount charge of 7% a year (a 4% reference rate plus 3%) under both.
Illustrative example One month's invoices, £100,000, under each product
- Invoice value
- £100,000.00
- Initial advance (85%, both products)
- £85,000.00
- Discount charge, 50 days at 7% a year (both products)
- £815.07
- Factoring service fee (1.5%)
- £1,500.00
- Factoring: total charges
- £2,315.07 (2.32% of invoices)
- Discounting service fee (0.5%)
- £500.00
- Discounting: total charges
- £1,315.07 (1.32% of invoices)
Over a year on £1.2m of invoicing the difference is about £12,000. Against that, the discounting client is running its own credit control. If that takes a part-time credit controller at, say, £15,000 a year, discounting is not the cheaper option; if an existing finance team has spare capacity, it clearly is. The right comparison is facility cost plus the cost of doing the work.
Figures are illustrative estimates only and do not represent a finance offer. Minimum monthly fees, set-up fees and other charges are excluded; actual rates and fees vary by provider and circumstances.
Use the factoring calculator to run your own invoice values through the same arithmetic, and see the invoice factoring costs guide for the charges this example leaves out.
Which one will a provider actually offer you?
The decision is only partly yours. Invoice discounting relies on the provider trusting your credit control, because it is advancing money against a ledger it does not manage, so providers apply stricter criteria: higher minimum turnover, a longer trading history, reliable management accounts and a demonstrated ability to collect. A business that wants discounting but does not meet those tests will usually be offered factoring or CHOCS first. A business that qualifies for discounting can almost always have factoring instead if it prefers the service. Our eligibility page lists what providers look for under each product.
Frequently asked questions
What is the main difference between factoring and invoice discounting?
Who collects the money. With factoring the provider takes over credit control and collects payment from your customers, and the arrangement is usually disclosed to them. With invoice discounting you keep credit control, your customers pay as normal, and the facility is usually confidential.
Is debt factoring the same as invoice factoring?
Yes. Debt factoring and invoice factoring are two names for the same product. Debt factoring is the term used in accountancy and business studies; invoice factoring is what most UK providers call it. Everything on this page about factoring applies equally to debt factoring.
Which is cheaper, factoring or invoice discounting?
Invoice discounting usually carries a lower service fee because the provider is not running your credit control. The discount charge on funds advanced is broadly similar. The difference narrows once you count the cost of running your own credit control under a discounting facility.
Can a small business get invoice discounting?
It is harder. Providers generally reserve invoice discounting, especially the confidential version, for businesses with established credit control, reliable systems and turnover often from around £500,000 upwards. Smaller or newer businesses are more often offered factoring or a selective product.
What is CHOCS?
CHOCS stands for Client Handles Own Collections. It is disclosed factoring where customers are told about the facility but the client business continues to chase and collect payment itself. It sits between factoring and invoice discounting.
Can I switch from factoring to invoice discounting later?
Often yes. Many providers offer both and will move a client from factoring to discounting once the business has shown it can run credit control to the required standard. Check the notice period and any termination fee in your existing agreement first.