There are two types of invoice financing: traditional invoice factoring and invoice discounting. Traditional factoring offers larger amounts of capital, but it is also costlier, and you have to be OK with the factor contacting your customers. Invoice discounting provides smaller amounts of capital but at lower rates, and it doesn’t require client contact.
The best invoice factoring provider based on our research is BlueVine. It offers up to $5 million in funding, does not contact a business’s customers, has low weekly starting rates, and offers funding in as soon as the next business day.
Invoice Discounting vs Factoring
Percentage of Invoice Advanced
Up to 90%
Up to 100%
0.75% to 5% per month
2% to 10% per month
1 - 3 days
1 - 3 days
Minimum Credit Score
Minimum Annual Revenue
Minimum Time in Business
What Invoice Factoring Is
Traditional invoice factors require you to “assign” your invoices to the lender, meaning that your customers must pay the factor instead of your business. After receiving payment, the factor will subtract its fees and release the balance to you. Factoring offers low minimum qualifications, large amounts of funding but requires a minimum monthly factoring amount.
What Invoice Discounting Is
Invoice discounting is often referred to as “discreet factoring” or “confidential factoring.” Like factoring, invoice discounting gives you money for unpaid invoices. However, it gives you more control over your invoices and customers. It offers financing with lower minimums, more flexibility, and provides small businesses with more control over customer relationships.
10 Differences Between Invoice Factoring and Invoice Discounting
1. Collections and Receivables Management
- Invoice factoring companies provide a valuable service by handling the collections and receivables management for a small business.
- Invoice discounting companies don’t provide collections of receivables management but also do not need to interact with customers.
2. Direct Interaction With Customers
- Invoice factoring companies have direct interaction with the debtors of a business. The level of interaction varies from templated emails to direct phone calls.
- Invoice discounting companies don’t contact a business’s debtors, which is preferable in industries where invoice factoring is uncommon.
3. Control of Invoices
- Invoice factoring companies take over the ownership of invoices, which gives them the rights to collect on those invoices.
- Invoice discounting companies lend against the value of invoices but do not control the invoices. Instead, they rely on a blanket Uniform Commercial Code (UCC) lien for collateral.
4. Awareness of Financing
- Invoice factoring companies must inform a business’s debtors that the invoices have been factored, which can be uncomfortable for some business owners.
- Invoice financing companies do not need to alert debtors, allowing small business owners to preserve their privacy about applying for financing.
5. Percentage of Invoice Financed
- Invoice factoring companies rarely finance over 90% of the invoice value. This is because there is a risk of nonpayment and a fee to be deducted.
- Invoice financing companies rely on the value of invoices when determining how much to lend. This lets these companies offer up to 100% of the invoice value.
6. Total Amount of Funding Available
- Invoice factoring companies offer up to $25 million per month in funding but have a high minimum funding amount. This makes it better for larger businesses.
- Invoice financing companies only offer lines of credit up to $100,000, but there are no minimum funding requirements, which gives smaller businesses more flexibility.
7. Minimum Annual Revenue Requirements
- Invoice factoring companies require at least $30,000 in invoices to be factored per month, which means the business needs an annual revenue of at least $360,000.
- Invoice financing companies have similar requirements to other short-term funding options, $100,000 in annual revenue with no minimum funding amounts.
8. Minimum Credit Score Requirements
- Invoice factoring companies don’t have a minimum credit score requirement. Instead, these companies rely on the payment and credit history of the business’s debtors.
- Invoice financing companies, like other alternative lenders, have a minimum credit score requirement, typically around 530.
9. Overall Funding Speed
- Invoice factoring companies can provide financing quickly. However, this is rare, and the typical funding speed is a few days to conduct due diligence.
- Invoice financing companies approve applications in less than 10 minutes and can provide funding the next business day because the application is automated.
10. Best Overall Fit
- Invoice factoring companies are best for large businesses with extensive receivables to factor needing a large amount of ongoing funding.
- Invoice financing companies are best for smaller businesses needing on-demand financing with minimal requirements and quick funding.
Invoice financing lets you free up the cash that’s tied up in your unpaid invoices. For small businesses that have an ongoing need for capital and don’t mind the factor contacting their customers, traditional invoice factoring may be a good solution. If you want to retain more control over your invoices and can’t commit to a long-term contract, then invoice discounting may be a better choice.