Invoice discounting and factoring
Produced in partnership with DLA Piper (UK) LLP
Invoice discounting and factoring

The following Banking & Finance guidance note Produced in partnership with DLA Piper (UK) LLP provides comprehensive and up to date legal information covering:

  • Invoice discounting and factoring
  • Distinguishing between invoice discounting and factoring
  • Invoice discounting and factoring–the process
  • Dilutions and challenges to ownership of a receivable
  • UK Finance

The popularity of financing business through the invoice discounting and factoring of receivables has grown significantly in the UK over the last 25 years.

Invoice discounting and factoring are types of receivables financing whereby a company, sole trader or partnership, known as the client, sells (ie assigns) its book debts (or receivables) together with all related rights, to an invoice discounter or factor (each a receivables purchaser) at a discounted rate. The advantage to the client is that it enjoys a more predictable and liquid cash-flow cycle.

This Practice Note:

  1. explains the basic difference between invoice discounting and factoring

  2. illustrates the invoice discounting and factoring process

  3. highlights the challenges that can arise in relation to the purchase of a receivable, and

  4. provides a brief overview of the UK-based trade association for asset based financing (including receivables finance)

Distinguishing between invoice discounting and factoring

Both invoice discounting and factoring facilities involve the purchase of receivables from a client by the receivables purchaser at a discounted rate.

The principal difference between the products is whether the sales ledger administration and collection functions of the client are:

  1. retained by the client (invoice discounting), or

  2. outsourced to the receivables purchaser (factoring)

Factoring is more suitable to small companies having less sophisticated internal sales ledger and debt collection processes. Invoice discounting is better suited to larger companies with more