Can I Switch from Factoring to Invoice Discounting?
Yes. Many businesses start with factoring (provider manages collections) and switch to discounting (you retain control) as they grow. Most providers offer both and can transition you. You typically need established credit management processes and, with many providers, £500k+ turnover to qualify for discounting, though some accept smaller businesses.
Why This Matters
Switching from factoring to invoice discounting reflects business maturation and can save significant money. Factoring typically costs 2-4% of turnover plus interest, with the provider managing your sales ledger and chasing payments. Invoice discounting costs 0.5-1.5% plus interest, but requires you to run credit control in-house.
For a business turning over £1.5m, that difference can run to tens of thousands of pounds a year. The transition isn't just about cost. Factoring can strain customer relationships when a third party chases debts, whilst discounting keeps funding invisible to clients.
However, discounting requires robust internal processes. Most UK providers like Close Brothers, Bibby Financial Services and Aldermore offer both products and actively encourage graduating clients to switch when ready, because it reduces their administrative burden whilst retaining the funding relationship.
Key Points
- Many providers look for £500k+ turnover for invoice discounting, though some go lower: Skipton Business Finance, for example, says it has arranged confidential discounting for SMEs with turnover as small as £100k
- Cost savings can be 1-2.5% of turnover when switching, so a £1m business might save £10,000-£25,000 annually in service fees
- Most factoring agreements include 30-90 day termination clauses, but some impose early exit fees of 3-6 months' charges if you switch provider rather than product
- Your existing factoring provider will assess your Days Sales Outstanding (DSO), bad debt history (typically needs to be under 1%), and credit control systems before approving the switch
- The transition typically takes 4-8 weeks, during which the factoring provider gradually hands back ledger management whilst maintaining funding
- You'll need dedicated credit control resource, either a full-time employee or outsourced service costing £2,000-£3,500 monthly for a £2m turnover business
- Invoice discounting requires monthly reporting to the funder showing aged debt analysis, which factoring providers previously compiled for you
Illustrative example
Hypothetical: a Bristol-based IT services company with £2.1m turnover has used factoring with an independent provider for three years, paying 2.8% service fees (£58,800 annually) plus 2.5% interest on drawn funds. They hire an experienced credit controller at £32,000 salary.
The same provider approves their switch to confidential invoice discounting at 0.9% service fee (£18,900) plus the same interest rate. Net annual saving was £39,900 minus the £32,000 salary cost, yielding £7,900 benefit whilst regaining direct customer relationships. An in-house controller with good product knowledge can also resolve invoice queries faster, which may shorten the collection period.
Common Pitfalls
- Underestimating credit control workload. Chasing £1m of outstanding invoices across 40+ customers takes many hours every week, not a part-time finance assistant's spare hours.
- Switching provider simultaneously with product type. This doubles complexity and can trigger a second round of due diligence fees. Graduate with your current provider first, then re-broker if needed.
- Assuming your factoring agreement allows free internal transfer. Some contracts treat product switches as new facilities, resetting minimum term commitments or imposing new setup fees.
- Inadequate systems for discounting compliance. You'll need accounting software that generates funder-specific aged debt reports, assignment schedules and weekly drawdown requests. Spreadsheets rarely suffice beyond £750k turnover.
- Failing to notify customers properly when moving from disclosed factoring to confidential discounting. Customers still sending payments to the old factoring address creates reconciliation chaos and funding delays.
What to Do Next
- Request a product migration assessment from your current factoring provider. They'll audit your DSO (should be under 60 days), bad debt ratio (target under 1%), and invoice dispute rate (under 5%) to confirm readiness.
- Calculate true transition costs including credit control salaries (£28k-£38k for experienced hires), software upgrades (Xero, Sage, or FreeAgent integrations cost £30-£80 monthly), and any contract exit fees if switching provider.
- Run a 90-day parallel test if your provider allows it. Handle collections internally whilst they shadow your work, proving capability before full handover and avoiding service fee savings clawback if the switch fails.
Related Questions
Will my customers know I've switched from factoring to discounting?
Only if you were using disclosed factoring. The transition involves stopping factoring assignment notices and resuming direct invoicing on your letterhead. Payments return to your bank account rather than the funder's collection account. Most customers don't notice if handled professionally, though some may query why payment instructions changed. With confidential discounting, customers never knew about the factoring, so nothing changes from their perspective.
Can I switch back to factoring if invoice discounting doesn't work out?
Yes, though providers typically require 3-6 months' notice and may re-impose factoring setup fees of £1,000-£2,500. Some include reversionary clauses in migration agreements allowing cost-free switches back within 12 months if DSO deteriorates beyond agreed thresholds (usually 65-75 days). However, switching back signals credit control failure, which may prompt stricter terms or reduced advance rates when you revert.
Do I need specific software to manage invoice discounting myself?
Most funders require cloud accounting software with aged debtor tracking, not just spreadsheets. Xero, Sage Business Cloud, and QuickBooks are widely accepted and cost £30-£60 monthly. You'll also need to generate weekly assignment schedules and concentration reports. Larger facilities (above £5m) often require integration with funder portals from providers like Close Brothers or Lloyds Bank Invoice Finance, which may need IT support to implement properly.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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