Is Invoice Discounting The Answer To Your Funding Situation?

By 05.25.23January 17th, 2024No Comments
Executives reviewing financial numbers.

With a plethora of funding solutions on the market, SMEs looking to access funding for their business could be excused for not knowing which solution is right for them.  An increasingly popular funding solution is Invoice Discounting.  eCapital look at what Invoice Discounting is, how it works and examines if it could help your business.

 What is Invoice Discounting?

 Invoice discounting is a finance solution which sees a funder advance cash to a business – normally up to 90% – against the value of its unpaid invoices.

When Would You Use Invoice Discounting?

Most businesses trade on credit with terms extending up to 120 days which can put a strain on their finances.  The traditional port of call when businesses need funding is to access an overdraft or a business loan from a mainstream bank.  However, at times, banks may be unwilling to provide a funding solution or indeed there may be better alternatives that would more closely match the needs of the business.

Are There Different Types of Invoice Discounting?

 There are two type of Invoice Discounting – Disclosed and Confidential.

 Confidential invoice discounting refers to an agreement in which the customer is not made aware that the business is using Invoice Discounting. This is normally available to businesses who have strong invoicing and collection processes in place.

Disclosed Invoice Discounting is where the customer is aware and makes invoice payment to the funder and not the business.

In addition to these two main variants, some funders may offer Selective Invoice Discounting which means that the business selects specific invoices to submit to the funder to finance rather than financing its entire sales ledger.

How Does Invoice Discounting Work? 

 A typical invoice discounting agreement includes the following steps:

  1. A business sells goods to its customer and raises an invoice, often with deferred payment terms of up to 120 days.
  2. The business needs working capital, so submits the invoice to an invoice discounting provider, presenting it as security for funds.
  3. The invoice discounting provider evaluates the invoice and creditworthiness of the customer and agrees to advance a percentage (up to 95%) of the invoice total as funds.
  4. The funder charges a pre-agreed fee, typically 1-3% of the funds used.
  5. The customer pays the invoice within the agreed 120-day window.
  6. The funder forwards the remaining 5% minus their fees to the business. 

Benefits of Invoice Discounting

Invoice discounting can provide a range of benefits to businesses who use it:

  • Easy and fast access to working capital that would otherwise be tied up in unpaid invoices.
  • Improved cash flow to invest in the growth of the business.
  • Boost profitability by using improved cashflow to negotiate early payment discounts.
  • Faster approvals – access to funds is based on the strength of the invoice rather than credit history or long-term forecasts, making it more likely that businesses will be successful in securing funding faster.
  • Customers are unaware of a funder’s involvement – Invoice discounting can be confidential, so the customer never knows that their supplier is using invoice discounting.

Is Invoice Discounting Right for My Business? 

Businesses who trade on credit can benefit from invoice discounting. It can help in several business scenarios:

  • Rapid growth– Working capital is essential to fund stock, new equipment, and staff to support growth. Invoice discounting allows companies to access cash quickly rather than wait weeks or months for invoice payments.
  • Cash flow problems– Invoice discounting frees up working capital improving cashflow to cover everyday business expenses.
  • Acquisitions – invoice discounting can release up to 90% of the value of unpaid invoices providing an initial upfront payment which can be used to support initial acquisition cost. The ongoing supply of funds can then support the business as it continues trading.

What Is the Difference Between Factoring and Invoice Discounting? 

Invoice Discounting and factoring are similar in that they are both provide funding against unpaid invoices.  But the main difference is who is responsible for chasing invoice payments.  With factoring, the finance provider often assumes responsibility for collecting invoice payment from customers. With invoice discounting, the business typically retains this responsibility.

If you are interested in learning more about invoice discounting, then visit or call 0800 007 3080.

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