Why is Invoice Discounting Often Better Than Factoring

For small businesses, managing cash flow is a constant challenge—especially when clients take 30, 60, or even 90 days to pay. Unlocking the value of unpaid invoices is one way to improve working capital, and two common methods of invoice financing are invoice discounting and factoring.

While both help release cash tied up in receivables, invoice discounting is typically the better choice for small businesses, offering more control, confidentiality, and flexibility. Here’s why.

What is Invoice Discounting?

Invoice discounting lets businesses borrow money against the value of unpaid invoices. The credit risk is not transferred over, so you stay in control and that's a key benefit.

How it works:

• You issue an invoice and submit it to the lender.
• The lender advances up to 90% of the invoice value, often within 24 hours.
• You continue managing the customer relationship and collect the payment as normal.
• Once the customer pays, you receive the remaining balance minus fees.

Why it suits small businesses:

• You stay in control of your credit management and customer relationships.
• It’s confidential—your customers usually don’t know you’re using finance.
• You only borrow what you need, and you can scale the facility as your business grows.
• You can cherry-pick invoices—with selective invoice financing, you choose which invoices to finance, giving you more flexibility and cost control.

What is Factoring?

Factoring involves selling your invoices to a third party, known as a factor, who then takes over collection from your customers. Credit risk is transferred over in that case.

How it works:

• You sell the invoice to the factor.
• They advance 70–90% of the invoice value.
• The factor contacts your customer directly to collect payment.
• Once paid, they return the remainder (less fees) to you.

Why it’s less ideal for small businesses:

• You lose control over collections, which can damage customer relationships.
• It’s disclosed—your customers deal with a third party, which may raise questions.
• Fees can be higher, especially if you want full-service factoring with credit checks and debt collection.
• You typically must hand over your entire sales ledger—factors prefer managing all invoices to reduce their risk exposure, as they take on the responsibility of collecting payment and assume client default risk.

Invoice Discounting vs. Factoring: A Quick Comparison

Why Invoice Discounting Makes More Sense for Small Businesses

1. Preserve Relationships
   Your customers deal with you—not a third party—so your brand and service experience remain consistent.
2. Stay in Control
   You decide who to offer credit to, when to chase payments, and how to manage collections.
3. Scale as You Grow
   As your turnover increases, so does your facility. Invoice discounting is flexible and grows with your business.
4. Improve Cash Flow Without Raising Flags
   Since it’s usually confidential, using invoice discounting won’t signal financial weakness to suppliers or customers.
5. Pick and Choose Invoices
   Selective invoice discounting lets you fund only the invoices that matter, avoiding unnecessary costs and maintaining strategic control.
6. Typically cheaper
   Since you keep the credit risk and continue to manage the invoice collection you are typically charged a lot less

What about Working Capital financing?

While working capital loans—such as those provided by lenders like Funding Circle or Iwoca—can sometimes appear cheaper (especially when spread over longer maturities to dilute arrangement fees), they come with notable limitations.

Firstly, these facilities are typically not flexible: you borrow a fixed amount and repay over a set schedule, regardless of your actual cash flow needs. That means you could be carrying more debt than necessary, paying interest on unused capital.

Secondly, this type of financing appears as debt on your balance sheet, which can affect your leverage ratios and dampen your credit rating—particularly if you're looking to secure other types of financing or negotiate terms with suppliers.

Lastly, this form of funding usually requires a personal guarantee from a company director or shareholder. This means that in the event of default, the lender can pursue the guarantor’s personal assets. Many business owners rightly see this as an undue risk, especially when less intrusive alternatives are available.

In contrast, invoice financing adjusts daily to your needs, is often treated as an off-balance-sheet facility, and doesn't add long-term liabilities, making it more agile and credit-friendly for small businesses.

Choosing the best Invoice Discounting option

​They are a lot of options on the UK market, but newcomer Triver stands out as an ideal invoice financing solution for small businesses due to its swift electronic onboarding process, seamless integration with accounting software like Xero, and its user-friendly platform. Businesses can set up their Triver facility online in just minutes, eliminating the need for extensive paperwork and personal guarantees.

Once set up, users can upload client invoices or use the integration with their bookkeeping package and receive funds instantly, providing immediate access to working capital. The integration with most UK bookkeeping packages allows for automated selection of invoices and efficient booking of fees, streamlining the financing process and reducing administrative tasks. This combination of speed, integration, simplicity and lowe cost compared to competitors makes Triver a superior choice, offering small businesses a flexible and efficient way to manage cash flow without incurring additional debt.

Conclusion

While both invoice discounting and factoring serve the same basic function—unlocking cash tied up in receivables—invoice discounting is often a better fit for small businesses. It gives you access to working capital without compromising customer relationships or control over your operations.

For most small businesses, especially those that value customer trust and want to maintain their brand reputation, invoice discounting offers a smarter, more discreet way to manage cash flow.