Invoice discounting vs factoring: which is better?

So, which is better for your business - factoring or invoice discounting?

Some businesses appreciate the additional benefits of invoice factoring; out-sourcing credit control can save time and money and reduce the risk of bad debts.

But the bottom line is, most businesses - given the choice - would rather finance their invoices confidentially so invoice discounting is generally the preferred option especially as it is cheaper than factoring.

However, not all businesses are eligible for invoice discounting.

To qualify, your business needs to be mature (not start up) with robust administration and credit control procedures already in place.

The discounter is relying on you to collect the debt, so you’ve got to be able to demonstrate that you do it well.

And because they are a lot more ‘hands off’ than with a factoring facility, they will also be reliant on you to provide timely, accurate monthly or quarterly management information such as a profit & loss and a balance sheet.

Even if you qualify for invoice discounting, your lender may decide that a factoring facility is more appropriate for your business.

This is usually because the lender has assessed the nature of your business and the debt you are asking them to fund as higher risk and therefore needs to have closer ongoing scrutiny of it, which can only be achieved with a factoring facility.