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Invoice Discounting vs. Invoice Factoring: Understanding the Key Differences in Cash Flow Financing

Invoice Discounting and Invoice Factoring are both financing solutions that help businesses manage cash flow by leveraging their unpaid invoices. However, they differ in terms of structure, ownership, and risk.

• 1. Invoice Discounting

• The business retains ownership of the invoices.
• The lender provides an advance (usually 70-90% of the invoice value) against the unpaid invoices.
• The business is responsible for collecting payments from customers.
• Once the customer pays, the remaining amount (minus fees) is released to the business.
• Confidential—customers may not be aware of the financing arrangement.
• Best suited for businesses with strong credit control and collection processes.

• 2. Invoice Factoring

• The business sells its invoices to a factoring company.
• The factor takes over collections and credit control.
• The business receives an advance (typically 70-90%), and the factor collects payment directly from the customers.
• Once payment is received, the remaining amount (minus the factor’s fees) is remitted to the business.
• Usually disclosed—customers know about the factoring arrangement.
• Suitable for businesses that want to outsource credit control and collections.

• Key Differences

Both models can improve working capital, but invoice factoring may be preferable for businesses looking to offload collections, while invoice discounting suits those that want to maintain customer relationships.