How Does Invoice Discounting Work UK?
Mark Harris
Relationship Manager · Aug 4, 2024 · 7 min read
Invoice discounting is a confidential form of invoice finance that allows UK B2B businesses to access cash against their outstanding invoices without their customers knowing. The business retains control of its sales ledger and credit control function, while the finance company provides the funding line in the background.
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The mechanics of invoice discounting
Once an invoice discounting facility is set up, the process works as follows. You raise an invoice to a customer in the normal way. You upload the invoice to the discounting provider's system. The provider advances you up to 85% to 90% of the invoice value, typically within 24 hours. Your customer pays you (not the finance company) in the normal way. You remit the payment to the provider and draw down the remaining balance minus fees.
The facility is revolving: as invoices are paid and new ones raised, the available funding adjusts automatically. The maximum available at any time is the approved advance rate multiplied by your outstanding approved debtor book. As your business grows and invoices more, the facility grows with it.
Cost structure and eligibility
Invoice discounting has two cost elements. The service charge covers facility administration and is typically 0.1% to 0.3% of annual turnover per month. The discount charge is the interest on funds drawn, calculated daily at a margin over the Bank of England base rate (typically base rate plus 2% to 4%). If you do not draw, you do not pay the discount charge.
Most providers require a minimum annual turnover of £500,000 to £1 million for invoice discounting, a track record of credit control (meaning you chase your own debts effectively), a predominantly B2B customer base with creditworthy commercial or public sector debtors, and at least 12 months of trading history. Invoice factoring is available at lower turnover levels and with less credit control infrastructure.
"Confidentiality is the primary reason businesses choose discounting over factoring. For many businesses, their customers knowing they use a facility would be commercially sensitive. Discounting solves this completely."
- Mark Harris, Relationship Manager
Frequently Asked Questions
How is invoice discounting different from invoice factoring?
In discounting, you manage your own collections and customers are unaware of the facility. In factoring, the finance company manages your sales ledger and collects debts on your behalf. Customers know about the factoring arrangement. Discounting requires stronger internal credit control and typically higher turnover.
The bottom line
Spark Finance compares 20+ invoice finance providers across both discounting and factoring. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Mark Harris
Relationship Manager
Mark is a Relationship Manager at Spark Finance with a strong track record in merchant cash advances and short-term business loans. He specialises in revenue-based finance for hospitality, retail, and leisure businesses, helping operators access flexible funding tied to card sales volumes.
