Invoice Discounting

What is invoice discounting?

Invoice discounting is a funding facility where a business borrows against its unpaid sales invoices while continuing to manage its own sales ledger and collect its own payments. The funder advances most of the invoice value as invoices are raised, typically 80 to 90 per cent, and the business repays as customers settle. Because the funder stays in the background, invoice discounting can be completely confidential. See our glossary of invoice finance terms for the language funders use.

How invoice discounting works

You raise invoices and run your credit control exactly as you do today. As invoices are raised, you notify the funder, usually through an automatic feed from your accounts software, and the funder makes the agreed percentage available to draw. Your customers pay into a collections account, in confidential facilities one that carries your business's name, and those receipts repay the funding. You draw what you need, when you need it, up to the value of your outstanding ledger. In practice it behaves like an overdraft that grows with your sales, without an overdraft's habit of being reviewed away at the worst possible moment.

The difference from factoring, in one sentence

With invoice factoring the funder runs your collections and your customers deal with them. With discounting you run your own collections and your customers deal with you, as they always have. Everything else follows from that one difference. Discounting is quieter, usually cheaper, and leaves customer relationships entirely in your hands. It also asks more of you, because the funder is relying on your systems to manage the ledger properly, which is why providers are choosier about who qualifies. We have written a full comparison at factoring vs invoice discounting if you are weighing the two.

Who qualifies for invoice discounting

Providers look for businesses that can demonstrably manage their own ledger. In broad terms that means an established trading history, commonly two years or more of accounts, turnover typically above £250,000 and often higher for confidential facilities, reliable accounting systems and a track record of collecting your own invoices on time. A finance function does not need to mean a finance department. Plenty of well-run smaller businesses qualify. If you are earlier stage or your systems are still maturing, factoring or selective invoice finance will usually be the better door in, and moving to discounting later as you grow is a well-trodden path we can plan with you from the start.

Confidential invoice discounting

For many businesses, the entire attraction of discounting is that nobody needs to know. In a confidential facility, invoices go out in your name, customers pay into an account in your name, and your credit control chases in your name. The funder is invisible from the outside. Confidentiality typically requires a stronger business profile than a disclosed facility, and we have covered the detail, including exactly how the trust account works, on our confidential invoice finance page.

What does invoice discounting cost?

Pricing follows the same two-part pattern as most invoice finance. A service fee, charged as a percentage of turnover, covers the facility itself, and a discount charge applies to the funds you draw. Because you are doing your own credit control, the service fee is normally noticeably lower than factoring for the same business, which is why larger businesses almost always prefer it. As ever, minimum fees, notice periods and additional charges vary between providers and matter as much as the headline rate. Our invoice finance costs and rates guide goes through them all.

Why arrange discounting through a broker?

Discounting providers differ more than their websites suggest. Turnover minimums, confidentiality criteria, sector appetite, concentration limits and pricing models all vary, and the market includes bank-owned funders, large independents and newer fintech providers with very different personalities. We know which providers on our panel suit which businesses, so one conversation with us replaces a round of applications. Our service is free to use. The provider pays our commission, and we will always tell you that arrangement exists.