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Dynamic Discounting vs Invoice Factoring: Which Should Mid-Market Suppliers Choose?
If your cash is tied up in unpaid invoices, you have two main options for unlocking it fast: invoice factoring or dynamic discounting. They both get you paid early — but the cost, mechanics, and relationship implications could not be more different.
What Is Invoice Factoring?
Invoice factoring means selling your unpaid invoices to a third-party company (a “factor”) in exchange for an immediate cash advance of 70–90% of the invoice value. The factor then collects the full amount from your customer and pays you the remainder, minus their fee.
The cost is typically 2–5% of the invoice value per month, depending on the creditworthiness of your customers and how long the invoice takes to be paid. On an annualised basis, that is 24–60% annualized — making it one of the most expensive forms of business finance available.
What Is Dynamic Discounting?
Dynamic discounting means offering your existing buyer a small reduction on an invoice (the “discount”) in exchange for them paying it earlier than the agreed due date. There is no third party — the buyer pays you directly. On Discount Flow, this is covered by the No Cost Enterprise Plan for suppliers.
The discount is typically 1–3% of the invoice value. All of that discount goes to the buyer — not to a platform fee. The buyer translates to an Est. Annual % of 12–24%. You receive 100% of the discounted amount directly from your customer within 48 hours.
The Cost Difference — In Numbers
| Scenario | Invoice Value | Dynamic Discounting (supplier cost) | Invoice Factoring (at 3%/month) |
|---|---|---|---|
| Small invoice | $10,000 | $0 | $300 |
| Mid-size invoice | $50,000 | $0 | $1,500 |
| Large invoice | $250,000 | $0 | $7,500 |
Cost to supplier per transaction, assuming 30-day factoring period.
Beyond Cost — What Else Matters
Dynamic Discounting
- Your buyer pays you — no third party
- Customer relationship fully intact
- No notification required to customer
- No credit check on your business
- No Cost Enterprise Plan for suppliers on Discount Flow
- Buyer earns a strong return — strengthens the relationship
Invoice Factoring
- Third party collects from your customer
- Customer may object to being contacted by a factor
- Notification of assignment often required
- Your creditworthiness is assessed
- Costs 2–5% per month
- Factor earns the return — not your buyer
The Decision Framework
The right choice depends on the quality of your buyer relationships:
- You have established buyers with predictable payment behaviour: Use dynamic discounting. It is cheaper, faster to set up, and preserves the relationship.
- Your buyers are unreliable or you need to finance receivables from many unknown customers: Invoice factoring may be necessary, but negotiate the rate carefully and understand the customer impact.
- You want to try both: There is no reason you cannot use dynamic discounting with your key accounts and maintain a factoring facility for the rest.
About the author
Kevin Potter · Discount Flow
Kevin Potter leads Discount Flow. He is a finance and strategy executive based in San Diego, California, and studied at Edinburgh Business School, Heriot-Watt University. Kevin is a Chartered Accountant, has a Masters in Finance and a separate Masters in Risk Management. Trained in big-four accounting and worked up through operational, CFO and CEO roles at mid-size and large corporations across several industries.
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