What is invoice discounting?

Waiting on customers to clear their bills can put the brakes on commercial cash flow, making it hard for business owners to stay on top of regular outgoings. But with invoice discounting, you could access much more of the value of your unpaid invoices in advance.  

Read on to learn what invoice discounting is, how it works and how to get started. We’ll also cover the key differences between invoice discounting vs factoring and explore invoice discounting advantages and disadvantages to help you decide if it's right for you. 

Invoice discounting: In summary

• Invoice discounting can give you quick access to capital tied up in unpaid customer bills that might otherwise take longer to be paid.

• Your business continues to handle its own customer ledger collections behind the scenes, rather than outsourcing the process. 

• While financing advances your funds, using the right accounting tools helps keep your underlying invoices matched and clean.

What is invoice discounting?

Invoice discounting is a form of short-term business funding that gives you access to a percentage of the value of your customer invoices in advance. Instead of waiting for customers to settle bills over 30 to 60 days, businesses can sell or assign their unpaid sales invoice ledger to a finance provider for an immediate cash advance.

How does invoice discounting work?

Invoice discounting works by using unpaid client invoices to secure a loan from a finance provider. It’s a type of invoice finance where businesses can borrow against unpaid invoices.

Here is the invoice discounting process explained: 

1. You raise a regular sales invoice for goods or services delivered to a client.

2. You upload or sync the invoice details to your financing provider.

3. The provider reviews the entry and lends you a percentage of the total value —minus an administrative service charge.

4. You collect payment from your client as usual when the invoice hits its due date.

5. The client pays the balance into a controlled account, and the provider releases the remaining percentage to you, minus fees. 

How to implement invoice discounting

Looking to launch an invoice discounting facility? We’ll walk you through the set-up process, from original evaluation to daily management, covering everything you need to get started. 

1. Check your internal accounts

Before approaching financial providers, you’ll need to conduct a thorough internal accounting evaluation. To keep responsibility for your own credit control under an invoice discounting model, you need to prove your collection workflows are orderly and that your customer billing ledger doesn’t contain any errors. 

2. Compile financial records

Finance providers will likely want to review your business accounts and your client base. As such, you may be asked to compile the following information:

• Detailed transaction statement

• Historical turnover figures

• Documents showing you have an established track record and stable commercial buyers.

3. Pick a finance provider

The next step is to pick a finance provider. Research providers to find a service that aligns the size and type of your business operation. Pay attention to hidden admin fees, contract lengths and minimum turnover requirements. 

4. Connect your invoice discounting software

Once a provider is approved, connect your invoice discounting software. Using integrated software can help with compliance and tracking by automatically mirroring your sales invoices. This helps to eliminate messy spreadsheet uploads and protects your records from manual formula errors.

5. Draw down cash and manage collections

Once the implementation is complete, you can start unlocking advanced funds. This will typically be between 80% and 95% of the value of your newly raised invoices, with a 24-to-48-hour delivery. 

Continue collecting payments from your clients as normal, ensuring they pay their balances into a designated bank account by their regular due dates. It’s up to you to chase any late payments. Once payments are received, the funder will release your remaining percentage to you, minus any service charges.

6. Maintain your regular tax workflows

It’s important to remember that bringing forward cash advances doesn’t change your fundamental accounting responsibilities. You’ll still be responsible for maintaining your regular tax workflows. This includes logging, calculating and reporting your regular VAT or Corporation Tax commitments accurately within your primary software by the set deadlines. 

Invoice discounting vs factoring

Invoice discounting and invoice factoring both let you borrow against unpaid invoices. But there are key differences between the two. Let’s explore the differences between invoicing discounting and factoring. 

Credit Control and Customer Contact

• With invoice factoring, the provider takes over your sales ledger and collects payments directly from your clients.

• With invoicing discounting, you’ll retain full control of collections. 

Confidentiality

• Invoice factoring is transparent to your buyers. This means they’ll know that an external party is involved.

• Invoice discounting is confidential, so your clients won't know you’re using a finance provider. 

Operational Suitability

• Invoice factoring may suit smaller businesses without dedicated internal finance administrative teams.

• Invoice discounting can work well for businesses with established credit management workflows.

Invoice discounting advantages and disadvantages

Not sure if invoice discounting is right for your business? Take time to weigh out the invoice discounting advantages and disadvantages below to help you decide. 

Advantages

• Confidential – Buyers won’t know you’re borrowing 

• Expands working capital quickly – Access cash within as little as 24 to 48 hours 

• Links directly to your sales growth – Convert unpaid invoices into immediate working capital 

• Lower fees - Invoice discounting can typically have lower fees than invoice factoring.

Disadvantages

• No support for payment collection – This places a high administrative responsibility on your internal team to run effective collections

• Service fees – Fees are lower than invoice factoring but can still eat into your profit margins

• Lack of flexibility – Can restrict your ability to switch funding providers smoothly. 

Invoice discounting software

Specialised invoice discounting software interfaces with your business accounts to mirror sales ledgers automatically. Automated software: 

• Compiles numbers

• Tracks outstanding values 

• Highlights upcoming deadlines.

It doesn't however run your final transaction submissions or payments automatically. You’ll need to do this yourself. 

Organise your financial records with QuickBooks

Tracking your business accounts with QuickBooks can help with compliance and financial oversite. QuickBooks accounting platform can help keep your customer invoices, billing histories and general ledgers organised (like making invoice numbering a breeze). It can also help to prevent errors and spreadsheet slips if you decide to apply for an invoice financing facility.

Learn more about QuickBooks invoicing software.

Invoice discounting FAQs

Will my clients know that I use an invoice discounting solution?

No, your clients won’t know if you use an invoice discounting solution. Confidentiality is one of the main features of invoice discounting. Clients won’t be aware you’re using external financing, so your day-to-day customer relationships will remain completely unchanged. 

Does accessing advanced invoice cash alter my VAT responsibilities?

No, advancing funds against a raised invoice does not impact how you calculate or report VAT on your regular submissions. You will however still need to record the full invoice values accurately within your software. 

Is invoice discounting a form of business loan?

Invoice discounting is a type of short-term financing where businesses use unpaid customer invoices as collateral to secure a loan. Instead of borrowing an independent lump sum that you repay over serval years, invoice discounting allows businesses to access cash their company has already qualified for by fulfilling an order. 

Is invoice discounting a good idea?

Invoice discounting might help your business if you’re an established B2B company, or if you regularly issue invoices with long payment terms and are searching for a quick and simple way to increase cash flow. If you operate a smaller firm, you might find it harder to qualify for invoice discounting. 

What are the risks of invoice discounting? 

Before you decide if invoice discounting is right for your business, it can be worth assessing the potential risks involved. This includes:

• Fixed contract terms

• Potential fees

• Lenders could carry out a hard credit check when you apply, which could cause a temporary dip to your business credit score.

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