Quick answer
When you sell invoices (factoring), a funder buys them and usually collects from your customer. When you borrow against them (invoice discounting or a receivables line), you keep ownership and collect yourself, and the invoices act as security. The difference decides who contacts your customers, who carries bad-debt risk and how the arrangement appears to other lenders.
Key points
- Selling an invoice transfers ownership; borrowing against it keeps ownership with you and uses it as security
- Factoring commonly means the funder contacts your customers; discounting is usually confidential
- Recourse decides who wears the loss if a customer never pays, so read it before price
- Both create a registration on the PPSR, which other lenders will see
- Compare total dollar cost on a real invoice, not headline wording, and include fees for services you may not need
Most invoice finance brochures use the words “sell” and “borrow” as though they were interchangeable. They aren’t. One hands your invoices to someone else; the other keeps them yours. That choice quietly decides who picks up the phone to your customers, who loses if a debtor disappears and what your bank sees on your file.
If you’re comparing offers, this guide sets out the structural differences first, then the money.
What does it mean to sell an invoice?
Selling is factoring. The funder buys the invoice from you at a discount, typically advancing the major share of its value up front and paying the balance, less fees, when your customer pays.
Because the funder owns the debt, it normally:
- Notifies your customer that payments go to the funder’s account.
- Runs credit checks and chases overdue amounts.
- Sometimes takes over the sales ledger, so you stop doing reminders.
That can be a real help if you have no one in the office to chase payments. It can also be a problem if your customers don’t expect a third party to appear in the relationship. Plan the conversation before the first notice goes out.
What does it mean to borrow against an invoice?
Borrowing is invoice discounting or a receivables line. You remain the owner of the invoice. The funder advances a percentage against your approved invoices, takes security over them, and you repay from the money your customers send you.
Features that usually come with it:
- The arrangement is typically confidential. Your customers keep paying you.
- You do the collections and the funder checks your reporting.
- Funders often prefer businesses with a steady ledger and a credit control routine, so there tends to be a trading history requirement.
The detailed distinctions between the two are laid out on our factoring vs discounting comparison, but the ownership question above is the root of them.
Who carries the loss if a customer doesn’t pay?
This is the most important clause in either agreement, and it can matter more than the price.
| Recourse | Non-recourse | |
|---|---|---|
| Customer fails to pay | You repay the advance or substitute another invoice | Funder absorbs the loss for covered reasons |
| Typical cost | Lower | Higher |
| Fine print | Usually broad | Often limited to customer insolvency, with a waiting period |
| Best for | Reliable customers, owners who trust their ledger | Owners worried about a concentrated, riskier customer |
Non-recourse sounds like insurance, but check what it excludes. Disputes over the quality of your work or delivery are almost always excluded. If the customer simply refuses to pay because they say the job was wrong, the loss lands back on you. Ask directly: “What events are covered, and after how many days?”
What does each one do to your books and other lenders?
Both models usually involve a security interest in your receivables, and that is registered on the Personal Property Securities Register (PPSR). Registration is public to other lenders and it affects them in a few ways:
- A bank holding a general security agreement may restrict you from selling or assigning receivables without consent. Joining a facility without telling them can breach your existing terms.
- A second funder will see the registration and may refuse to lend against the same invoices.
- For your accountant, a factoring arrangement can be treated differently from a borrowing, so ask how it will appear in your financial statements and in anything lenders review.
If you’re also planning a larger loan this year, see how lenders read the whole picture in what lenders look for in an application.
If you’re torn between the two models, an enquiry gives someone the chance to compare them against your actual ledger.
What are the costs in dollars?
Funders describe pricing in different ways: a discount fee, a service fee, an admin charge, a facility fee, a minimum monthly volume, sometimes a termination fee. Rather than comparing the headline, ask for a quote on one real invoice, from advance to final settlement.
Try this example. An invoice for $50k is issued on terms of 45 days. The funder advances 80% ($40k) immediately. Your customer pays on day 60 (15 days late).
| Item | Factoring quote | Discounting quote |
|---|---|---|
| Advance on day 1 | $40k | $40k |
| Fees across 60 days | Set by quote, may include a service fee | Set by quote, usually a finance charge plus admin |
| Balance released after payment | $50k less advance and fees | $50k less advance and fees |
| Collection effort | Funder | You |
The point of the table is the last line. If factoring costs more but saves a day a week of chasing, the real comparison is the fee against the time and bad debts avoided. Use our invoice finance calculator to run the numbers on your own invoice sizes, then check what happens if payment is late, because lateness is often priced separately.
Whole ledger or single invoices?
Many facilities require you to put every invoice through, or at least every invoice from approved customers. That keeps the funder’s risk spread but takes the choice away from you. A few providers allow selective or spot arrangements for individual invoices, usually at a higher price per invoice.
The difference matters if you have one slow customer and ten reliable ones. A whole-ledger facility will charge you finance on invoices that would have been paid on time anyway. Ask if you can exclude customers or cap the facility.
What should you ask before you sign?
- Is this a sale or a loan, in the contract’s own words?
- Who contacts my customers, and what do they say?
- Is it recourse or non-recourse, and what is excluded?
- What are all the fees in dollars on one invoice, and what changes if my customer pays late?
- Is there a minimum volume, a lock-in term or an exit fee?
- What is registered on the PPSR, and does it cover more than my invoices?
- Who will the funder speak to if there is a dispute?
Our guide on how to choose an invoice finance provider goes through these with more detail, and how invoice finance works is the starting point if you’re new to the idea.
Which suits which business?
- Small team, many invoices, no one to chase: factoring is often the practical choice, because collections come with it.
- Established ledger, strong credit control, customers who shouldn’t know: discounting preserves the relationship and is usually cheaper.
- One large customer on long terms: both work; look at concentration limits and whether the customer offers its own early-payment program.
- Seasonal or lumpy invoicing: ask about selective options so you don’t pay for unused capacity.
- Already have a bank facility: check consent and priority before choosing either model.
If your bank is happy to extend an overdraft against debtors, take that seriously, since a bank facility is often the least expensive option for an established business. If the bank has said no, or the limit won’t stretch, these are the alternatives.
A worked example (illustrative)
A freight forwarding firm bills $240k a month across about 30 customers, with an average wait of 52 days. The owner is offered two structures.
Factoring: advance on 85% of each invoice, the funder handles credit control and a service fee applies. Discounting: advance on 80%, a finance charge on drawn funds and a modest administration fee, with the firm doing its own collections.
She asks for a quote on a typical $20k invoice paid on day 52 under each. The discounting quote comes out lower in dollars, but she’d need to spend about half a day a week on collections. Her bookkeeper already does that, so she picks discounting, excludes two customers who always pay in a week and asks for the PPSR registration to be limited to receivables. The decision hinged on the fine print, not on the headline.
Choosing with open eyes
Both models can be a sensible tool, and neither is automatically better. The right one depends on who you want talking to your customers, what you are willing to bear if a debtor fails and how the registration sits alongside your other lenders.
If you’re comparing offers or haven’t started, send us your typical invoice sizes, payment times and the customers involved. The form takes about a minute and doesn’t trigger a credit check. We won’t pass your details round a pile of lenders, and a person with lending experience looks at your situation and phones you. The more accurately you describe the ledger, the sooner the right structure shows up.
Frequently asked questions
What is the difference between factoring and invoice discounting?
In factoring, the funder buys your invoices and often runs your sales ledger and collections, so your customers know. In invoice discounting, you stay in charge of collecting and the arrangement is usually confidential. The funder advances against the invoices and you repay from what customers pay.
Is selling an invoice the same as a loan?
Legally they differ, because a sale transfers ownership. In practice both give you cash earlier, and both are regulated by contract terms rather than a single standard. Look at what the agreement says about repayment, recourse, fees and what happens if you leave.
What does recourse mean?
With recourse, if your customer doesn't pay, you must buy back the invoice or repay the advance. With non-recourse, the funder wears some or all of the loss, usually for a higher price and only for credit-approved customers and defined reasons such as insolvency.
Will my customers know?
In factoring they usually do, because payments are redirected to the funder. In confidential discounting they generally don't. Ask which model you are being offered, and check how the funder will contact customers if an invoice goes overdue.
Does invoice finance show on the PPSR?
Yes. A funder takes a security interest in the receivables and registers it on the Personal Property Securities Register. Other lenders will see it and may ask about it, so tell your bank or other finance providers before you sign.
Which is cheaper?
It depends on invoice size, how long you wait and how much service is bundled in. Factoring can cost more because it includes collection services and sometimes credit protection. Ask for a worked quote on one real invoice, shown in dollars from advance to final settlement.