What is the difference between Invoice Discounting and Factoring?
Invoice discounting and factoring are similar and are both forms of invoice finance. There are few differences between invoice discounting and invoice factoring though, and these are mostly around who controls the ledger and whether your customers are aware of the lender.
With invoice discounting, you keep control of your accounts receivable ledger. That means you will be solely responsible for dealing with your customers to get your invoices paid. Some borrowers prefer this as they can control their customer relationships and don’t have the risk of a third party annoying them! With invoice discounting, your customers will not know there is a lender in the background which is why it’s called confidential invoice discounting or non-disclosed invoice discounting.
Factoring is when a business sells its invoices to a third party who then manages the ledger and collects the payments. A benefit of this for businesses is that responsibility for invoice collections is passed to the third party so the business can focus on other things. Because the factorer provides these additional services, it is more expensive than invoice discounting where collecting invoices is retained by the business. Given the customers are aware that the invoices have been sold to a factoring business, this is also known as disclosed type of invoice finance.