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Difference between Invoice Discounting and Invoice Factoring? How does it work?

Updated: Feb 12


Invoice Factoring and Invoice Discounting both help ambitious companies expand and grow. They refer to the same essential process: an asset-based Working Capital solution that allows businesses to get advances on cash they are due from customers, rather than waiting for those customers to pay. Businesses can then invest in growth.

Invoice Discounting and Invoice Factoring have become a significant source of working capital finance since the restriction of bank financing, as a result of the credit crunch.

What is Invoice Factoring?

Invoice Factoring is a common business financing solution that can be a lifesaver for small-medium businesses when faced with cash-flow problems. Invoice factoring is a form of financing that converts any outstanding invoices due to cash that will be immediately available for your business.

Although gaining wide popularity in recent years, invoice factoring can be dated back to the ancient Mesopotamians some 4,000 years ago and was favoured by the Romans. Merchants spread across the large global Roman Empire were able to conduct business in faraway places using factoring. Factoring made it possible for merchants to fund expeditions and continue business during the slow seasons – very similar to how it benefits today.

So how does Invoice Factoring work? It may sound like a fancy-schmancy concept but it’s not too difficult to get your head around… in essence, factoring is a form of invoice financing where businesses sell their accounts receivable book to an external finance provider to make your life easier.

You can get cash ‘now’ for all of your Invoices due, and wave goodbye to late payments. Your company can then use that cash to cover expenses that need taking care of. An external ‘factor’ will Purchase Invoices from a business allowing it to receive cash upfront rather than waiting around for customers to pay.

How does Invoice Factoring work?

If you’re wondering ‘what is Invoice Finance Factoring’ you’re not alone. The terms financing and factoring are all too easy to muddle-up. Though similar, they are not the same things and there are some key differences. Here’s an easy break down so you can see how both processes look.

A step-by-step guide to Invoice Factoring

Send an invoice copy to your customer that you’re factoring assign invoices to a chosen factor-factor will advance ~80% of the invoice (in cash) to you immediately your customer will then pay (in full) the factor when the invoice is due the factor will then forward the remaining ~20% (minus fees) in cash.

A step-by-step guide to Invoice Financing

Create an account with a lender and sync accounting software select all the Invoices you want to clear the lender will advance 100% of the selected invoices you will then repay the lender over the next coming days.


  1. You provide the goods/services to your customers and Invoice them.

  2. You send the Invoice details to the Invoice Finance provider.

  3. Funds are made available of a certain percentage of the face value of the Invoice. Usually within 48 hours (see different Factoring companies for Invoice advance % details).

  4. Either your credit controller or the Invoice Finance provider’s sales ledger service carries out the Invoice collection procedure.

  5. When your debtor pays, the balance of the Invoice is made available to you – less a service fee.

What are the costs?

How much does Invoice Factoring Cost? It’s common practice that you’ll get an advance of around 80% of your Invoice and then the remaining 20% after the Invoice has been paid minus, of course, the Invoice factoring rates which can vary from 1-4%. Some lenders will provide 100% of the advance rather than splitting it up and allow you to pay back the fees over the next 3-12 months.

The fee structure, however, will vary greatly depending on the factoring company you choose to go with and several other factors including:

  • Volume of monthly receivables

  • average size of invoices

  • Industry

  • Length of time it takes customers to pay

  • Creditworthiness of your customers

  • business credit score

It’s worth mentioning that the creditworthiness of your customers is one of the most important factors. The better behaved your customers (as in, the faster they pay) can mean for better agreement terms. Think about it this way, the factoring company will be taking on the financial risk of any Unpaid Invoices, so they need to know their risks beforehand.

When it comes to uncollected debt from your customer, each Factoring company will handle this scenario differently though the general path would see them taken to court to fight the case. Be sure to read the terms and conditions of each company as it will be outlined there or in your contract.

Why use Invoice Factoring?

Why use invoice factoring over taking out a regular Business Loan? The biggest plus to using invoice factoring is that it allows your business to stabilize its cash flow by removing payment delays from the equation. With a regulated stream of funds, you will be able to run and expand your business with more peace of mind. Invoice factoring is not a static loan offering a one-time payout, it’s a continuous agreement between two businesses (you and the factor) whereby both can benefit.

Who qualifies for Invoice Factoring?

Since Invoice Factoring is an extremely efficient way of increasing cash flow, businesses of all shapes and sizes including start-ups to large corporations use it as a cash flow tool. Meaning, any business in any industry can qualify for invoice factoring. When it comes to qualifying, it’s much, much easier than a traditional bank loan.

How to apply for Invoice Factoring?

For those who can’t qualify for alternative funding and need to better manage their cash flow, invoice factoring for small businesses is perfect, the question remains how do you apply for it? When you apply for invoice factoring via Loanguru, you’ll only need to fill out one application which will lead you to be shown relevant offers outlining the Factors and lenders that you can qualify for. Rather than applying through many companies to see if you qualify, Loanguru works to cut your work and make the application process much easier.

What an application process will look like:

Fill out a short application via Loanguru Invoice factoring application select the factor or funder that you would like to go with You ll receive an email where you’ll need to connect your accounting software used by your business read over the T&C’s and you’re ready to get started!

Why Loanguru?

  • Boost your chances of obtaining Business Invoice Discounting with Loanguru! By using advanced algorithms, your business’s financial profile will be quickly and accurately assessed to provide tailored guidance on how to improve your funding odds.

  • No more wishy-washy tips and tricks - get a personalized touch along with a dedicated service that won’t quit until you get funded!

Add to that the fact that lenders compete to provide you with the best Funding Solution and it starts to become clear just how helpful Loanguru proves itself to be for small business owners in need of financing.

If you have any questions or queries, follow this link below.


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