Invoice finance is the umbrella term for any facility that advances cash against unpaid customer invoices. Within that umbrella, the two main structures are invoice discounting (confidential, you handle collections) and factoring (the lender collects from your customer). The terms get used interchangeably in everyday conversation, but the structural and operational differences matter. This article breaks down what each one does, who it suits, and how to choose. If you want the basics first, read what is invoice finance and how does it work before this one.
Quick definitions
Invoice discounting. A confidential facility where the lender advances cash against your unpaid invoices but you continue managing collections. Your customer pays you directly on the standard payment terms, and you settle with the lender. Your customer does not know finance is involved.
Factoring (also called full-service factoring or debtor finance). The lender advances against your invoices AND collects from your customer on your behalf. The customer pays the lender, the lender settles with you. The customer knows finance is involved.
Selective invoice finance. A cherry-pick version of either structure: you choose which specific invoices to fund rather than committing your whole sales ledger. Useful when only some invoices are tying up cash that matters.
Invoice discounting: how it works
You raise an invoice with your customer on the standard credit terms. You either upload it to the lender directly or the lender pulls it from your accounting system via an integration. Within a day, the lender advances 80 to 90 per cent of the invoice value to your operating account.
You continue managing collections as normal. Statements and reminders go from you to the customer. The customer pays you on the agreed date, usually into a designated trust account or your normal account. You then settle the advance plus the lender fee.
The defining feature: the customer never sees the lender. Your branding, your collections process, your relationship. The finance is a back-office tool, not a customer-facing arrangement.
Factoring: how it works
Same up-front mechanism: you raise an invoice, the lender advances against it. The difference is what happens when the customer is ready to pay. The customer pays the lender directly. The lender deducts the advance plus their fee and pays the balance to you.
Operationally, the lender takes over the entire receivables management piece for the factored invoices: statements, follow-up calls, sometimes legal recovery. Some factoring providers also offer credit-checking on prospective customers as part of the service.
The defining feature: the customer knows the lender is involved because they pay the lender. The lender often appears in correspondence and may follow up directly on overdue invoices.
The big trade-off: control vs admin overhead
The choice between discounting and factoring usually comes down to one question: how much do you want to be in your customer relationship, and how much workload does collections actually take?
Invoice discounting suits businesses that have a smooth collections process already, customers who pay reliably, and a brand relationship you want to keep front and centre. You handle more administration but you keep total control of the customer interaction.
Factoring suits businesses where collections are a real workload (often growing businesses with lots of small invoices), where customer payment habits are inconsistent, or where the operational team would rather not spend time chasing money. You give up some control of the customer interaction in exchange for a meaningful workload reduction.
Recourse vs non-recourse
A separate axis that applies to both structures: what happens if the customer never pays?
Recourse facilities mean you carry the risk. If the customer goes broke or simply does not pay, you owe the lender back what they advanced. Most facilities are recourse, and the cost reflects that.
Non-recourse facilities mean the lender carries the risk of customer non-payment (subject to specific exclusions, often around disputes). You pay more for non-recourse because the lender is effectively insuring the customer credit. Often paired with trade credit insurance as a separate product.
For most B2B businesses with diverse, established customer ledgers, recourse facilities are cheaper and adequate. Non-recourse is worth considering if a single customer represents a large slice of your receivables.
Which suits your business?
Choose invoice discounting when: you have a stable customer base, you collect well, your customers do not need to know about the finance, and you have the administrative capacity to handle collections.
Choose factoring when: you are growing faster than your collections capacity, you have a high volume of smaller invoices, you would value the lender handling credit checks on new customers, or your customers are accustomed to dealing with finance providers.
Choose selective invoice finance when: only some of your invoices are causing the cash flow squeeze (e.g., one large customer with long terms), and you do not want to commit your whole ledger to a facility.
In all cases, working capital alternatives might be simpler if the issue is general cash flow rather than specifically invoice timing. We will tell you honestly which fits.
Where to from here
We compare both invoice finance and factoring facilities across our whole lender panel, including selective options for businesses that only want to fund part of the ledger. You pay us nothing; the lender pays us a commission when the facility settles. Book a 20-minute brief to map your options.
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