What is Invoice Discounting?

Invoice discounting is often preferred by more established businesses with robust credit controls in place. Invoice discounting involves a business using its unpaid invoices as collateral to secure a line of credit from a lender. The business retains control over its sales ledger and is responsible for collecting payments from their customers. The lender advances a percentage of the invoice value, typically 85%-90%, with the remainder, minus a fee, paid when the customer settles the invoice. This method is usually confidential, meaning your customers will not be made aware of the arrangement.

Invoice discounting is often preferred by businesses that wish to maintain direct relationships with their customers and handle their own collections.

As with Invoice Factoring, the funder will take out a legal charge known as a debenture against your invoices, allowing them to collect their money in the unfortunate event your business ceases trading.

You will agree a monthly service fee, which is the minimum fee the funder requires to make the facility financially viable for them. There is also a monthly discounting fee, which is the interest charged for the funds in use. 

We recommend having a conversation with us as certain funders on our lending panel will allow you to trial an invoice discounting facility for up to six months. You can leave at any time with no exit fee and at the end of the trial you would switch to a rolling contract.

Summary of Benefits

It allows immediate access to a portion of the funds tied up in unpaid invoices, improving liquidity and enabling businesses to cover expenses, invest in growth, or seize opportunities.

Businesses maintain control over their sales ledger and client relationships. They continue to handle invoice collection, which can be advantageous for maintaining customer relationships and preserving confidentiality.

Invoice discounting is typically a confidential arrangement. Unlike factoring, where the third-party contacts customers directly, with discounting, the customer might not be aware of the financing arrangement between the business and the lender.

The funding obtained through invoice discounting grows in line with the business’s sales, providing a flexible source of finance that adapts to the company’s needs.

By accessing funds tied up in unpaid invoices, businesses can reduce financial stress caused by extended payment terms or late-paying customers. This stability contributes to better financial planning and management.

While there are fees associated with invoice discounting, the costs can be lower compared to other forms of borrowing, making it a cost-effective way to access working capital.

As a business grows and generates more invoices, the available funding through invoice discounting also increases, making it a scalable financial solution.

Accessing cash through invoice discounting can help a business meet financial obligations promptly, potentially improving its creditworthiness and ability to negotiate better terms with suppliers or lenders.

These advantages make invoice discounting an attractive financing option for businesses looking to optimise cash flow while retaining control over their sales ledger and customer relationships.

See our video below on the difference between Invoice Factoring and Invoice Discounting:

Our Other Invoice Finance Services

Invoice Factoring

Invoice Factoring is a popular choice for newly established or growing businesses. The funder will advance between 85%-90% of the invoice value and manages the credit control on your behalf, confidentially if required.

Single Invoice Financing

Single invoice finance, also known as Spot Factoring, allows you to receive an advance against single or selected invoices. This can be used as and when required, without the need for any long-term commitment.

Woman using a calculator for some calculations

Revolving Credit Facilities

Established businesses with a turnover above £1M often prefer a revolving credit facility. With no requirement to upload invoices and typically available without a personal guarantee, a revolving credit facility is a fantastic ‘In case of need’ product.

Construction Finance

In the construction industry, Construction Finance is used to release cash against your applications for payment or payment certificates. It can also be used in other industries that receive staged or milestone payments throughout the term of a contract.

Switching Funder

If your Invoice Finance facility is due for renewal, it’s worth reviewing your fees, service levels, funding amount and concentration limits to see if there is a better deal, or a more suited facility on offer in the market.