What is invoice discounting?

Small business invoice discounting explained: how it works, who it’s for, and how you can find a lender

Invoice discounting is a variation on factoring where the lender still advances money on a business’ invoice but, instead of the lender collecting the debts for the business, the business collects its own debts.

In this article, we’ll take a closer look at invoice discounting in particular. If you’re looking to use this type of financing in your business, or are interested in discovering if this cash flow option may be available to you, then read on. You’ll learn more about:

Read to discover more about invoice discounting. If you’re ready to compare quotes now, complete the form at the top of the page.


How does invoice discounting work?

Step 1: You raise and submit the invoice, and send a copy to the invoice discounter.

Step 2: The lender then pays you a percentage advance of the total value of the invoice. This value is usually around 80-90% of the invoice but depends on what is offered to you by the lender and what advance you want to take.

Step 3: You then chase and collect the money your customer owes you, before depositing it into a client account with the discounting company.

Step 4: Finally, the invoice discounter pays you the remaining balance of the invoice (the 10-20%), less a small fee for the borrowing charges.


What are the pros and cons of invoice discounting?

One advantage of invoice discounting is that the advance can be higher than factoring, with a smaller fee for borrowing.

However, there is still usually a monthly fixed charge on the percentage of your turnover for processing. This means if you stop using the facility you will still be paying the monthly charge.

Some businesses also prefer invoice discounting over factoring as the process can be kept confidential, so none of your customers need know that you are borrowing in this way.

This allows you to be even more flexible in offering credit to your customers without impacting on your customer relations, as no third party is involved in negotiations.

It does, however, mean that you have to pay a fee without handing over any of the responsibility for your debt collection.

Pros

Invoice discounting can offer a higher advance than factoring

Smaller fee for borrowing

Confidential – your customer’s don’t need to know you’re using it

You can offer credit to your customers with greater flexibility

No impact on your customers relations

No third party involvement in negotiations

Cons

Usually a monthly fixed charge on percentage of turnover

Still pay the monthly charge even if stop using the facility

Incur fees and retain responsibility for debt collection

Generally, only invoices that are 90 days old or less will be accepted.


What type of businesses are eligible for invoice discounting?

The idea behind invoice finance products is that they can be tailored to the majority of business situations and needs. When considering if your business is eligible, lenders will check:

  • Type of business – do you provide sales on credit to your customers?
  • Amount of turnover – what is your business’ annual revenue?

Don’t worry if your turnover is not high, as lenders work with a range of business types and sizes – your case should still be reviewed. But it’s possible that other types of invoice finance solutions will be offered to you as they may be more appropriate for your situation.

These products could include factoring or single invoice finance (also known as spot factoring).

Common users of invoice discounting include:

  • Recruitment companies
  • Businesses that outsource manufacturing or distributors
  • Other service providers that work on the basis of a fee payable on completion of a project – for example, if you start a plastering or plumbing business

Ineligible companies include shops, which typically take payment at the point of sale.


How can you find an invoice finance lender for your small business?

Invoice finance is a product most banks actively offer. Also, there are a whole variety of specialist invoice finance companies and introducers, such as accountancy firms that have good relationships with particular lenders.

Another option is to use an invoice finance broker as opposed to choosing a particular lender. A broker will be able to provide you with a wider variety of specialist services and should be able to present a number of options to suit your individual needs.

Originally, the Asset Based Finance Association (ABFA) was the first port of call to find a lender. In 2017, it was integrated into UK Finance, the organisation which represents some of the leading financial firms in the UK.


Summary

This article has explained what invoice discounting is, as well as the pros and cons. Plus, it looked at what types of businesses would be eligible for this type of factoring. Finally, it provided details of how you can find an invoice finance lender.

Key points to know

There are four steps to invoice discounting:

  1. Raise invoice
  2. Receive advance
  3. Chase and collect funds
  4. Receive remaining balance
  • Remember it’s a confidential process – your customers don’t have to know you’re using this type of financing
  • Consider the finances – invoice discounting offers a higher advance than factoring but fees can be restrictive
  • Check if your business is eligible – look at your business’ turnover and type
  • Choose from banks as well as specialist lenders or brokers for invoice discounting

Compare invoice discounting options

The information on this page should help you to understand what your business might need in terms of invoice discounting. For more information though, you should speak to an expert – Startups can help with this.
Comparing UK quotes with Startups is the best way to find the service and equipment most suited to your business.

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  1. This is very nice article. It has great information about invoice discounting and factoring. invoice discounting is a financial service enabling you to release funds tied up in unpaid invoices, via a third party advancing funds against money due to you.

    Can you please tell me how can we reduce invoice discounting costs?

    • One way to reduce invoice discounting cost is to pay pay fix fee rather paying percentage of turn over.