Swoop COVID-19 Hotline|UK0203 868 0364|Apply for CBILS

Invoice discounting

Quick facts

What is invoice discounting?

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.

Why choose invoice discounting?

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.’

Is it suitable for an SME?

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 start-ups – you need to have a reliable turnover.

Pros and cons of invoice discounting

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.

Have you also considered?

Invoice discounting 
Invoice discounting is the simplest type of invoice finance. It involves a lender advancing you money against unpaid invoices and charging a fee based on the value. This form of finance is suitable for bigger companies with a relatively high turnover as it allows them to secure funding against their entire sales ledger. 
Invoice discounting is confidential, so your customers don’t know you’re using their invoice as collateral. Your company remains in charge of its own credit collection. It’s also considered riskier so your lender may require evidence that your customers pay promptly and you have in-house capacity to chase outstanding payments. 

Spot factoring
Spot factoring allows you to borrow money against specific unpaid invoices rather than your sales ledger, so it’s also suitable for companies with at least a few large customers. The main difference with selective invoice discounting is that spot factoring is disclosed. You hand over control of the invoices you choose to finance to the lender who collects payment from your customer and forwards your company the balance less its fee. Spot factoring may suit SMEs that don’t have the resources to chase outstanding payments and are happy to let a lender take the responsibility on their behalf. 

Confidential invoice finance 
Confidential invoice finance is a suitable funding option if you prefer your customers to remain unaware that you’re securing finance against their invoices. 
Confidential invoice finance refers to forms of invoice finance that aren’t disclosed to your customers. We’ve already described invoice discounting, but confidential invoice factoring and CHOCs (Customer Handles Own Collections) are other examples of this type of finance. 
CHOCs (Customer Handles Own Collections)
CHOCs, short for Customer Handles Own Collections, is a cross between invoice discounting and invoice factoring. As with invoice discounting, you deal directly with your own customers. However, like invoice factoring, your customers pay the lender instead of your company, so they know you’re using their invoices to secure working capital. 

CHOCs are suitable if you’d like to maintain a direct relationship with your client or for early-stage companies that don’t qualify for invoice discounting, as long as they can prove they have the in-house capacity to chase outstanding payments. They can also offer a more cost-effective option for companies with lots of small customers. 

Don’t waste time – there are plenty of funding and saving solutions to help your business grow

Get started for FREE

Subscribe to our newsletter

Receive relevant industry updates, news, partner offers and more when you sign up.

We work with world class partners to help us support businesses with finance