Table of Contents
- What Is Invoice Discounting?
- How Does It Work?
- A Simple Example
- Why Do Businesses Use It?
- Who Can Use It?
- Invoice Discounting vs Invoice Factoring
- Is Invoice Discounting Safe?
- What Does It Cost?
- How to Start with Invoice Discounting
Many Businesses Don’t Realise They Can Use Their Invoices to Get Paid Sooner
Key Takeaways
- Invoice discounting helps businesses get money faster, instead of waiting for customers to pay.
- It is a type of short-term loan based on the value of unpaid invoices.
- You still collect the payments from your customers yourself, so it stays private.
- The finance company gives you up to 95% of your invoice amount in just a few days.
- Once your customer pays, you repay the loan, along with a small fee.
What Is Invoice Discounting?
Invoice discounting means getting early access to the money you’re owed by using your unpaid invoices to borrow cash before your customers pay you. An invoice is a bill you send to a customer after selling them goods or services. But many customers don’t pay right away. Some take 30, 60, or even 90 days to pay. That waiting time can cause problems for your business if you need the money now to pay bills, buy stock, or grow your business.
Instead of waiting, you can use invoice discounting. A finance company gives you most of the invoice value upfront, usually up to 95%. This gives your business a boost in cash while you wait for your customer to pay. Once the customer does pay, you return the money to the finance company along with a small fee for using the service.
How Does It Work?
Invoice discounting works like a short-term loan. You are not selling the invoices, you’re just borrowing money against them. Here’s how the process usually works:
First, you sell your product or service to a customer and send them an invoice. Then, you send a copy of that invoice to an invoice discounting company. After checking that the invoice is valid, they lend you most of the money, usually within a day or two.
Your customer still pays you directly. You stay in charge of following up and making sure they pay on time. Once they do, you repay the loan to the invoice discounting company, along with a small fee. This fee is usually around 1% to 3% of the invoice value, depending on the lender and how risky they think the loan is.
Sometimes, your customers will pay into a special bank account that looks like your business account but is actually controlled by the finance company. This helps keep everything private and safe.
A Simple Example
Let’s say you run a business that sells equipment to construction companies. You sell £10,000 worth of tools to a customer and send them an invoice. The customer agrees to pay in 60 days.
Instead of waiting two months, you send the invoice to an invoice discounting company. They give you £9,500 right away. This means you can use the money to buy more stock, pay your staff, or cover your bills.
When the customer finally pays the £10,000 invoice after 60 days, you pay back the £9,500 loan plus a small fee. The fee might be £200, so you keep the rest of the money.
Why Do Businesses Use It?
The biggest reason businesses use invoice discounting is to get money faster. As business owners, we prioritise first the turnover ratio of our business’ performance. This means that your business is making more than it spends. It is also a known fact that in the business world, where time is money, there shouldn’t be any delay as much as possible when it comes to operations.
When there are more expenses than income, then that basically means your business is drowning. Invoice discounting allows you to prevent this. It also helps during busy times or slow seasons when money is tight.
Invoice discounting can also be faster and easier to get than a bank loan. It grows with your sales; if you have more invoices, you can get more money.
Who Can Use It?
Businesses that usually utilise invoice discounting are business-to-business types. This means that one company sells to another company instead of selling to customers. Technically, their customers are other businesses.
These businesses also send their customers (businesses) invoices since it is more common to send invoices, especially in large volumes of orders. They then offer the payment terms in “Net 30” or “Net 60”, which means that the customers pay in 30 or 60 days.
Some businesses even consider longer, like 90 days or more. Depending on how the business agrees to the terms, especially if they are fair to both parties.
To qualify, your business usually needs:
- A good number of invoices every month
- Reliable customers who pay their bills
- A clean and simple invoicing system
Invoice Discounting vs Invoice Factoring
Both of them allow you to access money before your customers pay you, but there is a difference in terms of who chases the money.
With invoice discounting, you borrow money using your invoices. You still chase your customers for payment, and they never know you used a finance company.
With invoice factoring, you actually sell your invoices to a finance company. They collect the money from your customers directly. This means your customers will know you are using a finance company. Some businesses don’t mind this, but others prefer to keep things private.
Factoring companies often take over your credit control, which means they are the ones who remind customers to pay. This can save you time but might change how your customers feel about working with you.
Is Invoice Discounting Safe?
Yes, invoice discounting is safe, and it’s used by many large and small businesses. The biggest thing to watch out for is making sure your customers actually pay. If they don’t, you still have to repay the loan.
Some companies offer a service where the finance company takes the risk if your customer doesn’t pay. But this is more common with invoice factoring and not usually available for invoice discounting.
You also want to work with a trusted invoice discounting company. Always check reviews, and ask questions before you sign anything.
What Does It Cost?
The cost of invoice discounting is usually between 1% and 3% of the invoice value. This depends on your business size, how many invoices you want to discount, and how risky the lender thinks your customers are.
There may also be a service fee or setup charge. It’s important to ask the finance company to explain all their fees clearly before you start.
Even though there’s a cost, many businesses find that the benefits are worth it. Having fast cash can help you take on new jobs, grow your team, or survive a slow period.
How to Start with Invoice Discounting
Getting started is easy. First, decide if you want to discount all your invoices or just a few. Some companies offer something called “whole turnover discounting,” which means they cover all your invoices. Others allow “selective discounting,” where you choose which invoices to include.
Next, contact a few invoice discounting companies and compare their offers. Look at their fees, how fast they pay, and what services they include. It’s also a good idea to speak to your accountant for advice.
Once you choose a company, they’ll help you set things up. This usually includes connecting to your invoicing system and setting up a payment process. Many companies do this online, which saves time and paperwork.
Many Businesses Don’t Realise They Can Use Their Invoices to Get Paid Sooner
A lot of business owners don’t know this, but those unpaid invoices sitting on your desk or in your accounting software, can actually be used to get money right now. You don’t have to wait 30, 60, or even 90 days for your customers to pay. That’s time you just can’t afford to lose.
In business, time really is money. Every day you wait to get paid is a day you’re still covering wages, rent, stock, and other costs from your own pocket. Delays in cash coming in can cause real problems, even if your business is doing well on paper. The bills don’t wait. Your staff needs to be paid on time. Your suppliers expect payment. And your customers won’t always understand if you fall behind just because you’re waiting on someone else to pay you.
Invoice discounting helps solve that problem. It turns those unpaid invoices into working capital, money you can use now to keep your business moving, whether you’re growing fast or just trying to stay steady. It’s not a loan you take out based on guesswork. It’s your money, just arriving faster.
Frequently Asked Questions
What types of businesses can use invoice discounting?
Any B2B (business-to-business) company that sends invoices and waits to get paid.
Do I need to have a lot of invoices?
Not a lot, but you should invoice regularly and have reliable customers.
Is it only for overdue invoices?
No, it’s for current invoices that haven’t been paid yet.
Will my customers know I’m using it?
No. It’s usually confidential.
What’s a trust account?
A bank account controlled by the lender but in your business name, used to collect payments.
Can I use it for international invoices?
Sometimes—check with the lender. Some accept international invoices, others don’t.
Does my credit score matter?
Yes, but your customers’ credit scores matter more.
Can I stop anytime?
Depends on the contract. Some let you stop anytime, others need notice.
What if my customer doesn’t pay?
You still have to repay the lender unless you have bad debt protection.
Can I use this with other finance types?
Yes, but don’t fund the same invoice twice.
Will it affect my customer relationships?
No, because they won’t know you’re using it.
Are there industries that can’t use it?
B2C or business-to-consumer industries.
Is invoice discounting regulated?
Some providers are regulated, some aren’t. Always check.
Can I use it if I have bad credit?
Maybe—strong customers help, even if your credit isn’t perfect.
