What is Invoice Discounting and How Does It Compare to Invoice Factoring?

After delivering your product or service, waiting 30, 60, or 90 days for customers to pay can strain any SME’s cash flow. Invoice discounting is an SME finance tool that turns your unpaid invoices into immediate cash. In simple terms, invoice discounting allows you to borrow money against your outstanding customer invoices, bridging the gap between billing and actual payment.

To understand invoice discounting clearly, it helps to compare it with its cousin, invoice factoring. Both are forms of invoice financing (or “debtor finance”) used by businesses in South Africa as cash flow solutions. The goal of both is the same: unlock funds tied up in your accounts receivable. But the way they operate has key differences:

• Invoice Factoring: You sell your unpaid invoices to a third-party company called a factor. The factor (often a finance/factoring company) pays you a large portion of the invoice value upfront, usually around 70-90% of the invoice amount. The factor then takes over the collection process – they will be the ones contacting your customer for payment. Once your customer pays the invoice to the factor, the factor remits the remaining balance to you, after deducting their fees. Essentially, factoring outsources your credit control: your client knows you’re using a factoring service because they pay for the factor directly, who may even communicate as the new creditor. This can save you time on chasing payments, but it means involving a third party in your customer relationships.
• Invoice Discounting: You retain ownership of the invoices and responsibility for collections but use them as collateral to get a cash advance. In this scenario, a lender (like a bank or alternative finance firm) provides you with a loan or line of credit based on the total value of your outstanding invoices. You might get a similar advance (say 70-90% of invoice values) upfront. The critical difference is your company still collects the payments from customers as normal – customers typically are not aware of the arrangement. When the customer eventually pays you, you then repay the lender the amount advanced plus a fee or interest. Invoice discounting is often confidential, meaning your clients don’t know you’ve financed their invoices. You maintain the direct relationship with them, sending invoices and follow-up reminders as usual.

Key Differences: The biggest distinctions between factoring and discounting come down to control and visibility:

• Control of Collections: With factoring, you outsource the collection of payments to the factor (they handle the sales ledger for those invoices) . With discounting, you keep control and continue managing your own receivables. For businesses that prefer to handle customer interactions themselves and keep financing invisible, discounting is ideal. If a business would rather not deal with collections (perhaps it’s time-consuming or difficult), factoring can be attractive.
• Customer Awareness: In factoring, your customers will likely know a financing company is involved – for instance, they may receive notices to pay the factor, or the factor might communicate with them directly. In discounting, it’s usually entirely discreet. Customers still pay into your bank account (or a trust account that looks like your account). To the outside world, nothing has changed – you’re simply getting paid faster behind the scenes. This discretion can preserve your professional image; clients won’t get the impression that you’re struggling with cash flow (as some SME owners have concern).
• Cost: Both services charge fees, but factoring might be more expensive because the factor provides additional services (credit control, debt collection). Discounting can sometimes have lower fees or interest since you’re doing the leg work on collections, and the lender’s risk may be slightly less when you remain accountable for chasing invoices. However, pricing varies by provider and contract.
• Use Cases: Invoice factoring is often favored by businesses that either don’t mind customers knowing about the financing or that need the extra help managing receivables (for example, small companies that don’t have a dedicated credit control team). It’s also common in industries where assigning invoices is routine. Invoice discounting is preferred by businesses that have a solid credit control process and want to maintain a seamless customer experience. Many growing SMEs opt for discounting to keep relationships smooth – the customer just pays as usual, unaware of any financing arrangement.

In South Africa, both invoice factoring and discounting are available and widely used as cash flow solutions. Some providers offer both and can tailor the product to your needs (for instance, “confidential invoice discounting” is basically discounting where even correspondence is kept under your company’s name).

Which is better? It really depends on your business’s priorities. If you value privacy and control, invoice discounting is likely the better fit. If you need immediate cash and don’t have the capacity to chase payments, and you don’t mind clients dealing with a third party, factoring could be useful. The good news is that either way, you’re unlocking funds tied in invoices rather than waiting for money to trickle in. Both can provide a vital cash injection to keep your operations running or growing.

To sum up, invoice discounting is a flexible funding option for SMEs in South Africa that want quick access to cash while keeping their client relationships under their own management. It’s a bit like having an overdraft secured by your invoices. You get the benefit of fast cash flow without openly involving a financing company in your customer dealings. Knowing the difference between discounting and factoring helps you choose the solution that best suits your business style and needs.