How Invoice Discounting Works
The business raises invoices in the normal way and notifies the discounting facility provider. The provider advances a percentage (typically 80-90%) of the invoice value against the raised invoice. The business continues to manage credit control and chases payment from customers in the normal way. When payment is received into the business's bank account (often a trust account set up for this purpose), the advance is repaid and the remaining balance released, minus fees. The facility revolves continuously as new invoices are raised.
Confidential Invoice Discounting
Confidential invoice discounting (CID) is the most commonly used form of invoice discounting. The facility is entirely invisible to customers - they see no change in their invoicing or payment process. This is a major advantage for businesses where maintaining the appearance of financial strength is commercially important.
Whole Ledger vs Selective Discounting
Whole ledger discounting covers all B2B invoices raised. Selective discounting allows the business to choose which invoices to discount - useful for businesses with a mix of short and long payment terms, or where only specific customers drive the working capital pressure.
Eligibility for Invoice Discounting
Invoice discounting typically requires: a minimum annual turnover of £500,000 (some specialist lenders start at £250,000); an internal credit control function; B2B invoicing only; invoices that are undisputed and unconditional; a clean or near-clean credit profile; and at least 12 months of trading history. Discounting generally requires a more established business than factoring.
Cost of Invoice Discounting
Invoice discounting is typically slightly cheaper than factoring because the business manages its own credit control, reducing the factor's workload. A service fee (0.2-1% of invoice value per month) and a discount charge (1.5-5% per annum on funds advanced) are the typical cost components.