Invoice Discounting

What is invoice discounting?

Invoice discounting is a form of asset-based lending in which a finance provider advances funds against the value of your unpaid invoices. You retain responsibility for collecting payment from your customers and your customers pay you as normal. The lender's involvement is typically not visible to your customers, making it a confidential facility.

Once a customer pays you, you use those funds to repay the advance. The lender charges interest on the funds drawn and usually a service fee for the facility. The result is a revolving credit line secured against your sales ledger, which expands and contracts with your trading activity.

Invoice discounting vs invoice factoring

The core distinction is who manages credit control. With invoice discounting, you continue to chase your own customers for payment and they pay you directly. With factoring, the finance provider takes over credit control and customers pay them directly.

Invoice discounting is generally preferred by more established businesses with their own credit control function, or those for whom maintaining confidentiality with customers is commercially important. Factoring tends to suit smaller businesses or those who want to outsource collections.

• Invoice discounting: you retain credit control, customers pay you, confidential
• Invoice factoring: provider manages collections, customers pay them, disclosed
• Both advance a percentage of invoice value, typically 70 to 90 percent
• Both charge a service fee and a discount rate on funds drawn

Benefits of invoice discounting

The primary benefit is access to working capital tied up in your ledger, without your customers knowing you use external finance. This preserves your commercial relationships and your reputation as a financially independent business.

Invoice discounting scales automatically with your business. As your turnover grows, so does the facility limit, without the need to renegotiate terms or apply for additional credit. This makes it particularly well-suited to fast-growing businesses.

• Confidential arrangement, invisible to your customers
• You retain full control of your customer relationships and credit control
• Facility scales with turnover automatically
• Lower cost than factoring in many cases, as you manage collections yourself
• Compatible with all B2B sectors

Costs and considerations

Invoice discounting costs comprise a service charge and a discount rate. The service charge is typically 0.25% to 1.5% of turnover. The discount rate is the interest charged on funds drawn, typically 1.5% to 3% above the Bank of England base rate.

Because you retain credit control, lenders will want to see that your collections processes are robust. If your debtor days are high or your ledger has a significant proportion of overdue invoices, you may find lenders apply tighter advance rates or require additional covenants.

Worked Example

A manufacturing business has a monthly turnover of £500,000, with 45-day average payment terms. It wants to fund a large stock purchase without taking out a term loan.

1. The business enters a confidential invoice discounting facility with an 85% advance rate
2. With £750,000 of invoices outstanding (1.5 months' turnover), the available facility is £637,500
3. It draws £400,000 to fund the stock purchase
4. Interest on the £400,000 at 4.5% p.a. costs approximately £1,500 per month
5. As customers pay, the facility replenishes and the business repays the drawn amount

The business funds a growth opportunity at a cost of approximately 0.4% of the amount drawn per month, without taking on fixed-term debt or giving visibility of the arrangement to its customers.

Eligibility

Frequently Asked Questions

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