Late payment is a tax on growth for British SMEs. Waiting 60 or 90 days for a customer invoice to settle is now standard in sectors like construction, recruitment and wholesale, and the cash gap that creates is one of the most common reasons UK businesses approach a finance broker. Two products solve the same problem by releasing the cash tied up in your sales ledger: invoice discounting and factoring. They share the same mechanics, but they suit very different businesses.
This guide breaks down how invoice discounting and factoring compare in 2026, what each costs, who qualifies, and how to choose the right option for your SME.
What is Invoice Discounting?
Invoice discounting is a confidential funding line secured against your sales ledger. The lender advances a percentage of each invoice you raise, typically 85 to 90 percent, within 24 hours of the invoice being uploaded to their platform. You retain full control of credit control and customer relationships. Your customers never know a third party is involved.
The balance, less the lender’s fee, is paid to you once your customer settles. The facility is revolving, which means it grows in line with turnover rather than being capped by a bank manager’s appetite. Businesses that have outgrown an overdraft often switch to invoice discounting for exactly this reason.
Most lenders set a minimum turnover for invoice discounting of around £500,000 to £1 million. The product relies on the borrower running its own credit control well, so smaller businesses without a dedicated credit controller are usually pointed at factoring instead.
What is Factoring?
Factoring is the same idea with one critical difference: the lender takes over your credit control. The factor advances the same 85 to 90 percent of each invoice, but they also chase your customers, collect the cash and run your sales ledger. Customers know who the factor is. The arrangement is fully disclosed.
For many SMEs this is a feature rather than a drawback. Younger businesses and owner-managed firms often have no dedicated credit controller, and outsourcing the chasing to a specialist who handles thousands of debtors a month can shorten payment cycles meaningfully. The trade-off is losing the customer relationship around payment, which matters more in some sectors than others.
Factoring is widely available from turnovers as low as £50,000, which makes it the more common starting point for businesses new to invoice finance.
Invoice Discounting vs Factoring: The Key Differences
| Feature | Invoice Discounting | Factoring |
|---|---|---|
| Credit control | Your team | The lender |
| Customer awareness | Confidential | Disclosed |
| Typical minimum turnover | £500k to £1m | £50k upwards |
| Advance rate | 85 to 90% | 85 to 90% |
| Service fee | 0.2 to 0.5% of turnover | 0.75 to 3% of turnover |
| Discount fee | Base rate plus 2 to 4% | Base rate plus 2 to 4% |
| Best suited to | Established SMEs with in-house credit control | Smaller or growing SMEs |
The headline cost difference sits in the service fee. Factoring is more expensive because the lender does more work. The discount fee, which is effectively interest on the cash advanced, is broadly similar between the two products and tracks the Bank of England base rate.
Which Invoice Finance Option Should Your SME Choose?
The right answer turns on three questions. How strong is your in-house credit control? How sensitive are your customer relationships? And how large is the facility you need?
Established businesses turning over £1 million or more, with a finance team that already chases debtors, should almost always look at invoice discounting first. The lower service fee and the confidentiality protect commercial relationships, particularly where the customer is a large corporate or public-sector body that might view factoring as a sign of distress.
Younger businesses, recruitment agencies funding weekly payroll, and any SME without a credit controller usually benefit more from factoring. The collection function is genuinely useful and the higher fee buys back time the directors would otherwise spend chasing payment. Construction firms working with retentions, recruitment agencies with weekly invoicing, and wholesalers with concentrated debtor books are typical factoring users.
A third option worth weighing is selective invoice finance, where you fund individual invoices rather than the whole ledger. This suits businesses with occasional large invoices to fund rather than a permanent working capital need. We cover selective invoice finance and the wider toolkit in our asset-based lending guide.
Costs, Eligibility and What Lenders Look At in 2026
Both products are priced on two layers. The service fee is a percentage of turnover put through the facility, typically billed monthly. The discount fee is interest on the cash drawn, usually quoted as a margin over the Bank of England base rate. As base rate moves, so does the all-in cost of the facility, which is something to factor in when modelling working capital costs across the year.
Lenders underwrite the quality of the debtor book as much as the trading business itself. Three factors matter most. Debtor concentration is the first: lenders prefer no single customer above 25 to 35 percent of the ledger. Debtor quality is the second: creditworthy commercial buyers underwrite well, consumer or unverified buyers do not. Contractual position is the third: clean invoices with no contra accounts or retention clauses that would block collection.
Businesses with concentration issues or contractual complexity, such as construction retentions, recruitment back-charges or export buyers, usually need a sector-specialist lender rather than a generalist provider. A decline from a high-street bank is rarely the end of the conversation. The independent and challenger lender market has deepened considerably over the last three years.
Choosing between invoice discounting and factoring is rarely a clean binary. The right facility depends on your sector, turnover trajectory, relationship with your largest customers and how much administration you want to keep in-house. Pricing varies widely between lenders, and the difference between the cheapest and most expensive quote on the same deal can be one to two percent of turnover annually. That is real money on a £3 million facility.
For businesses comparing options, the usual route is to review three quotes from lenders with relevant sector experience rather than accepting the first offer from an incumbent bank. Our team places these facilities every week and can match your circumstances to the lender most likely to approve at the best price. There is more on the broader funding picture in our business loans guide, or you can speak to us directly.
Get in touch with Growth Business Finance for a free, no-obligation consultation. Call us on 020 3432 2341 or apply online at growthbusinessfinance.com today.