What is invoice discounting?

Invoice discounting is a form of invoice finance that enables a business to raise funds using unpaid invoices as collateral. It can help protect your business from bad debt and improve your cash flow by unlocking the value of your invoices.

If you decide you want to use this form of financing, when you raise an invoice to your clients you need to supply your chosen financial provider with a copy of it in order for payment to be authorised. You can normally obtain up to 85% of the invoice value as credit subject to your own unique business circumstances.

This method of finance is different from invoice factoring, in that you remain responsible for obtaining payment on outstanding invoices. This means you are in full control of your own credit systems and will need to chase payment from your clients yourself.

Once you receive payment for an invoice, you must then pay the outstanding balance for that invoice back to your invoice discounter (finance company). Once these funds have been cleared, they will send you the balance owed, minus their fee. This balance is the margin of the invoice that was not financed.

As long as you keep on top of your credit control and are able to meet timings on customer invoice payments, then invoice discounting may be the best choice for you. It turns debts owed to you into cash, enabling you to maximise the capital from your sales ledger.

This finance option is ideal for medium-sized businesses that have a well established credit control department. You won’t have to deal with banks, allowing you the flexibility to inject capital into your business quickly and efficiently. Typical fees for this service range from 0.2 to 0.5 per cent of turnover. Invoice discounting fees are less than those for invoice factoring, because only finance is provided.