How does invoice discounting work?

Monday 10th January 2022

Invoice discounting is a finance facility that provides near-instant access to cash that’s tied up in outstanding invoices. Under a standard invoice discounting arrangement, you won’t need to wait for a client to settle their account. Instead, you simply forward invoices straight to your lender, who then releases funds to match a prearranged percentage of the invoice’s total value.

Funds are normally made available 24-48 hours after you have supplied a copy of your invoice(s), and you don’t usually pay fees until your clients have settled the rest of their bills.

Invoice discounting allows you to maintain strong cash flow, and focus on developing your business. Invoice financing arrangements also allow you to smooth over some of the problems that are caused by late and/or slow payment.

It also enables you to pay bills on time, order new stock and invest in equipment, infrastructure or staff. All while you’re waiting for clients to settle their accounts.

In this article:

  1. How invoice discounting works
  2. Advantages of invoice discounting
  3. Is invoice discounting right for your business?
  4. How to get the most out of invoice discounting solutions

1. How does invoice discounting work?

  1. You supply goods and services to your customers.
  2. You send your customer the invoice made payable to the invoice finance provider and send them a copy.
  3. You will then receive up to 90% of the invoice amount. At this stage, a service fee is deducted from your account as a percentage of your turnover.
  4. The customer settles the invoice in full by making their payment direct to the invoice finance provider. When the remaining balance is paid, a small finance fee is deducted from your account, charged as a percentage of the amount lent
  5. This invoice clears and you receive the remaining 10% balance minus the finance fee.

Find out how much invoice discounting would cost your business using our calculator

Invoice finance calculator

2. What are the advantages?

Compared to other types of invoice financing, invoice discounting has the advantage of being:

1. 100% Confidential

Your clients don’t need to know you’re using an invoice financing solution. Businesses that use invoice discounting solutions normally maintain full control of the debt collection process, and benefit from being able to control all client communications

2. Continuous

In the sense that funds are released every time you forward an invoice. This arrangement provides you with a steady influx of working capital, and spreads payments across the month.

3. Flexible and straightforward

No hidden fees or confusing conditions

3. Is invoice discounting right for my business?

Generally speaking, invoice discounting facilities are offered to companies that:

  • Have been financially solvent for more than 6 months
  • Offer 30-120 day payment terms to their clients
  • Have a robust debt collection and credit management process
  • Focus on B2B (business to business) contracts
  • Have a turnover of £250,000 or more per annum

Invoice discounting solutions are ideal for businesses that fit these criteria, and also:

  • Struggle to maintain good cash flow
  • Frequently have to chase late payments
  • Have a lot of money tied up in their ledger
  • Want to focus on managing their operations, and not collecting invoices
  • Want to expand or invest in a sustainable way

4. How do I get the most out of invoice discounting solutions?

Invoice discounting works best when companies issue invoices as soon as their goods or services are delivered. This ensures that cash can be released quickly, and allows your lender to provide a steady stream of working capital.

Invoice discounting also works best when companies have a strong credit management team/process because invoice discounting solutions hinge on your ability to recover debts from your clients, and your lender is unlikely to get involved in the collection process.

Want to learn more about how invoice discounting can boost your businesses cash flow? Get in touch

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