Invoice discounting

Quick facts

Invoice discounting is arguably the simplest form of invoice finance – it’s a way of borrowing money using your unpaid invoices. Invoice discounting is aimed at larger, established companies with a relatively high turnover, and is designed to finance your entire sales ledger (i.e. all of your invoices). It’s usually confidential, so your customers and suppliers won’t be aware of the arrangement.

As with all types of invoice financing, invoice discounting lets you sell unpaid invoices to a lender in return for a cash advance a percentage of the value of each invoice Once your customer has paid an invoice, the lender pays you the remaining balance minus their fee. In other words, if you’ve issued invoices to your customers and these haven’t yet been paid, invoice finance unlocks this value early. It’s like a business loan, but instead of using a physical asset like a building as security, invoice finance uses your accounts receivable.

Invoice discounting is very similar to invoice factoring. The main difference is that with invoice discounting your customers won’t be aware that you are using a finance provider to help with your cash flow – hence why it’s often called ‘confidential’ invoice discounting. You remain in control of your sales ledger, you collect payments as normal and you maintain communication with your customers.

Your lender may, however, insist on a ‘disclosure’ clause – this means you will have to mark invoices as ‘assigned to an invoice provider.’

If you don’t have in-house credit management processes in place, invoice factoring might be a more suitable option, because you wouldn’t need to chase invoices yourself.

Invoice discounting and invoice factoring are generally more widely available to established businesses rather than startups – you need to have a reliable turnover.

Because invoice discounting is a riskier prospect for your finance provider than factoring, you might find it hard to obtain if you’re an early-stage business. To qualify for invoice discounting you need to reassure your finance provider that they’ll be repaid by your customers after advancing money to you. So you will need:

  • an established method of credit collection
  • a track record that proves that your clients pay on time.

If you want to finance only specific invoices – and not your entire sales ledger – then you might want to consider selective invoice discounting or spot factoring.

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