What is invoice discounting and how does it work?

Invoice discounting is a means of increasing working capital by “selling” a company’s outstanding sales invoices to an invoice finance company as and when they are raised in return for an immediate payment of a pre-agreed percentage of the invoice value.

Maintaining a positive cash flow is vital to the success of any business and invoice discounting is just one finance solution available to businesses providing you meet the lender’s criteria. By borrowing the amount of money owed to you from your customers instantly instead of having to wait for the invoices to be paid, this ensures that you can keep on track of running your business day to day instead of being hindered by low or inconsistent cash flow.

Unlike factoring where the factoring companies also maintain the sales ledger and carries out the credit control, with invoice discounting the company continues to maintain it’s own sales ledger and handles it’s own credit control.

Additionally, it is confidential as there is no notification on the invoice that the debt has been assigned to the finance company so the customer is unaware of the arrangement.

In practice the discounting company will advance up to 85% of the invoice value (including VAT) as and when the invoices are raised with the balance of 15% being paid over when the customer has paid the debt.

Who would this service benefit?

This solution is suitable for most companies that sell a product or provide a service and is more effective for companies who’s major assets are the trade debts owing to them as banks are no longer interested in offering overdraft facilities to this type of company, especially if the company is newly established.

Most business that sell on trade credit terms and would like to improve their cash flow can benefit from this service. Maybe you have too many invoices that clients haven’t paid, or are simply waiting on one or two large invoices to be paid.

If you want your business to grow a ready supply of working capital is essential and a cash injection can be highly beneficial, giving you enough operational capital and ensuring you stay on top of your own business payments. Failure to do so means that you could end up turning work down due to lack of funds and could also mean that late or unpaid bills generate interest, increasing the money you owe.

Cash flow problems remain one of the main reasons for small businesses failing in the UK.

How does invoice discounting work?

The company will raise an invoice as per usual, send it to their customer and then depending on which finance company is being used and how they operate, the company will either upload the details of the invoice to the discounter’s accounting system or submit a schedule of invoices raised to the discounter or even submit copies of each invoice to the discounter.

The company will then be eligible to receive the pre-agreed percentage of the invoices, usually after 24 hours.

The company will maintain their own sales ledger and carry out their own credit control but the customer will pay into a trust account rather than the company’s existing bank account and on receipt of the payment the company is entitled to the unadvanced balance of the invoice less the charges.

In practice when a company sets up an invoice discounting facility they will “sell” all outstanding invoices to the invoice finance provider.

As an example, a company turning over £500,000 pa whose customers pay in an average of 50 days will have outstanding debts of about £82,000

If the arrangement provides for an initial payment of 80% it is likely that the discounting company will make available an initial payment of up to £65,000 against these outstanding debts with the balance of £17,000 less the discounter’s charges being made available as and when the customer pays.

How much does invoice discounting cost?

There are generally two costs involved with the first being a service charge or discounting fee and that is highly variable between each individual company and also between each factoring company but the range of 0.25% to 1% of turnover would cover most companies whose sales turnover is in the range of £250,000 to £2m per annum.

The second cost involved is the discount charge or cost of funds used and that tends to be in the range of 2% to 4% per annum over bank base rate.

Invoice Discounting FAQ

Unlike many other invoice finance brokers, we are completely independent and are not affiliated with any specific finance company not bank nor insolvency practitioner and so not only will we offer you impartial advice and guidance completely free of charge but we can assure you that we'll seek the best deal for your business as we have your best interests at heart.
Unlike traditional bank borrowing which tends to be limited to available security, invoice finance is far more flexible as it is geared to sales and as turnover rises the availability of funding will rise in line with it.
Most invoice discounting companies can move very quickly with a decision in principle often available within hours and the funding in place within a week to ten days.
Yes. Invoice finance is available for new companies and even startups as the finance company’s security is in the strength of your customer and not your own balance sheet.
You don't need to! We do that for you because we are a specialist broker so that's all part of the service we offer - we'll seek the best deal for your business that benefits you the most and due to the volume of enquiries that we handle we are likely to be able to obtain keener rates for you than if you go directly to the finance company.

More Reading...

Check out some additional reading from our blog about invoice discounting:

We Deliver Results!

As the factoring and invoice discounting industries have grown, so too has the number of companies offering sub-par service and deals.

Factoring Solutions is an independent broker, meaning that we are not affiliated with any factoring company. Therefore, you can rest assured that we always have your best interests at heart and we will seek the very best invoice discount facility for you and your business that benefits you the most.

For an informal chat, please contact us on 01827 707680 without any obligation whatsoever to discuss the various options open to you safe in the knowledge that we will only ever introduce you to one of the few discounters that offer high service levels and as we receive an introductory fee from whichever funder we place you with, we will never charge you any fees at all.

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