Invoice Factoring vs. Invoice Discounting: Cash Flow Solutions

The Problem: Long Payment Terms

If your clients pay Net 60 or Net 90, your cash is tied up for months. Invoice factoring and discounting solve this by converting invoices to immediate cash.

Invoice Factoring

You sell your invoice to a factoring company. They pay you 80–90% upfront, collect from your customer, and keep the remainder (minus fees).

• Upfront cash: 80–90% of invoice value immediately
• Cost: 2–5% of invoice value per month
• Setup: The factor handles customer communication and collection
• Best for: Businesses with many invoices and tight cash flow

Invoice Discounting

Similar to factoring, but you remain responsible for collecting. The finance company provides the cash, you collect from the customer.

• Upfront cash: 80–90% of invoice value immediately
• Cost: 1–3% of invoice value per month (cheaper than factoring)
• Setup: You handle customer relations; customer may not know
• Best for: Stable businesses with good relationships; more administrative burden

Example

You invoice ABC Ltd for £10,000 (Net 60)

With Factoring:
- You get: £9,000 immediately (90% upfront)
- Factor keeps: £1,000 (10% + 2% service fee)
- You avoid waiting 60 days

Cost over 60 days: £300 (2% × 3 months)
vs. waiting for £10,000 in 60 days

Pros & Cons

Pros: Immediate cash, no collection hassle (factoring), improved cash flow

Cons: Expensive (3–5% monthly), factors may contact your customers (damage relationship), requires good credit

When to Use

• Large invoices that would otherwise hurt cash flow
• Regular B2B invoicing with Net 60+ terms
• When growth is cash-constrained

Alternatives

• Invoice financing: Borrow against invoices as security (1–10% APR)
• Business line of credit: General cash borrowing (typically 5–20% APR)
• Negotiate shorter terms: Ask clients for Net 30 instead of Net 60