Invoice discounting

Imagine you invoice a client for £10,000. Your invoice discounting facility offers a 75% advance, so you receive £7,500 almost immediately. When your client pays the full invoice amount (e.g., £10,000) later, the lender releases the remaining balance to you—minus a service fee. If the fee is £250, you’d ultimately receive £9,750, retaining control over the transaction and your client relationship throughout.

Invoice discounting is normally confidential (it's sometimes called 'confidential invoice discounting'). You’ll continue to deal with customers yourself as normal – your customers won’t know you’re using a finance provider. The downside to this is that you’ll still have to chase invoices yourself, unlike invoice factoring.

Invoice discounting is similar to factoring, however there is one fundamental difference. With factoring, your customers might know that you're in receipt of finance because the lender will typically manage your sales ledger and credit control processes. As such, they’ll chase any late payments on your behalf. On the other hand, invoice discounting allows you to retain autonomy over all communications and customer service. When it comes to fees with regard to invoice discounting vs invoice factoring, discounting is often the cheaper option. 

Here are some of the things that can impact how you’ll be charged for invoice discounting.

Value of invoices

How large the invoices are will have an impact. Think of it like this – if your client doesn’t repay an invoice worth £20, chances are you can find that money elsewhere. But if your client reneges on an invoice worth £1M, you’ve got a big problem and that problem will likely be passed onto the lender, as they’ll need to chase you on this very large payment. This increased risk can result in an increased fee – but it’s not that simple. The administrative tasks the lender must engage in to organise invoice discounting for each invoice are similar, so you may receive a reduced fee, rather than an increased one, in particular if your lender perceives you to be very trustworthy. The only way to truly ascertain how the value of your invoices will impact your fee is to talk to your lender, or our support team – they should be able to help you get a clearer picture surrounding fee structures.

Company size

Smaller companies can suffer from higher rates when it comes to invoice discounting. It is unfortunate, but inescapable, that larger businesses may have more to leverage when it comes to negotiating with lenders. This can make invoice discounting both an easier and cheaper solution for them than their smaller peers. If you’re looking for invoice discounting and you’re a small business, feel free to get in touch with our team. We’ll see if there’s any way we can help.

Number of invoices

As mentioned, the bargaining power of having many invoices discounted is not to be underestimated. In some cases, lenders even offer a scalable pricing system that reduces the fee per invoice as the number of invoices increases. This could lead some businesses into that debt trap we spoke about before – after all, if more invoices equal a reduced fee, it can become easy to slip into a mentality of “I’m saving money.” Be cautious, tread carefully, and consider each invoice as if it were its own mini-loan. Always ask yourself, “how can I repay this loan if my client defaults? How often does this client repay on time? Am I prepared to take the risk?”

Creditworthiness

Creditworthiness is a measure used by lenders to assess how likely you are to repay a loan. Lenders evaluate the creditworthiness of loan applicants by taking into account their credit score, bill payment history, outstanding company debt, assets vs liabilities, and profitability. High creditworthiness often equals a lower rate, whereas low creditworthiness usually means a higher rate. If you apply as a limited company, the lender will likely look at your company’s creditworthiness. If you apply using a personal guarantee or you apply for a sole trader loan, the lender may look at your personal creditworthiness. That said, it’s not unusual for lenders to look at both.

Track record

Your track record with debt will also have an impact on how much a lender is likely to charge for invoice discounting. A better history with debt could result in a reduced rate, whereas a negative history with debt would have the opposite effect.

Only you can really decide if invoice discounting is the most suitable solution for you. However, here are some examples of companies where invoice discounting may be a good answer, and some where it wouldn’t be.

Example A: Company A is a large B2B enterprise. They raise a lot of invoices and have standard payment terms of 30 days. They’d like a short term cash injection to help pay for a new industrial-level printer. 

They only want to use invoice discounting for a few invoices and due to their size, they’ve been able to find a lender who is offering quite low fees. Their accounting team is very on top of invoice chasing and the invoices they want to use for discounting have been raised with very reliable clients. They’ve got great relationships with their customers but they want to keep this confidential.

In this instance, invoice discounting may be a suitable solution.

Example B: Company B is a small B2B company and they’re wondering if invoice finance is a suitable option for their start up. They’ve been in business for around 1 year and they’re finally starting to get some clients signed up. Company B is made up of three founders and they each contribute to projects with their own time, so they are able to deliver on all client projects without external support and fortunately, at this time, they don’t need to pay suppliers before clients settle invoices.

Company B believes (since they now have some solid case studies) it’s now time to put together and execute a marketing plan and onboard their first employee—a business development executive. But they would need additional funding to facilitate this. They would like to take out a loan to kickstart these activities and would like to spread the cost over an extended period, to ensure they’re able to repay the loan in full as they grow in size.

Since invoice discounting is not available for smaller companies, it is for more established businesses with higher turnovers and clear credit control processes already in place, in this instance, invoice discounting is not a suitable option.  

A short term loan in and of itself might not even be the right answer for them either. Company B may want to consider a government backed start up loan, which would enable them to take out up to £25,000. This type of loan would come with 12 months of free support and guidance, which could be essential for a business this young. These loans also come with a set interest rate of 6%, have no application or early repayment fees, and can be taken out for 1 to 5 years.

If you’re looking for something a little different, there are many alternatives to invoice discounting. Which one to use depends on your requirements.

Invoice factoring

Unlike invoice discounting, which is essentially a secured business loan where your invoices are used as the collateral, invoice factoring is the actual sale of your invoices in exchange for cash. Both are different types of finance that sit under the invoice finance umbrella, so if you’re looking for an alternative to invoice discounting, invoice factoring is one possible option

Bridging loans

Bridging loans are a form of short term funding, they’re usually used to pay for property development or acquisitions while the buyer or developer waits for additional funding, for instance, in the form of a mortgage or sale. Bridging loans don’t have to be used for property, but they do need collateral

Company credit card

Business credit cards are used to pay for business related costs, for instance, inventory or office suppliers, and are then (usually) repaid on a monthly basis. The funds can then be reused the following month

Revolving credit facility

This is similar to a business credit card (in fact, company credit cards sit under the umbrella of revolving credit facilities) except they don’t necessarily need to come in the form of a card that can be drawn from. Cash and cheque based revolving credit facilities are available to eligible businesses, making this a possible option for any businesses looking to meet payroll obligations or pay suppliers

Short term business loan

Short term business loans generally come with shorter repayment terms and higher rates than their longer term business loan counterparts. They supply a quick cash injection that can be used to cover emergency expenses

Asset finance

Asset finance generally refers to one of two things. The first is the ability to lease, borrow, or purchase an asset and spread the cost, for example, this type of funding can be used to buy a truck on finance. The other type of finance is called asset refinance – this allows you to borrow against an asset you already own, giving you access to funding while retaining use of the asset

Overdraft

Business overdrafts are usually facilitated by a financial institution you already use in some capacity, for example, you may have an overdraft with a bank you currently have a current account with. It’s a pre-approved line of credit designed to cover short term expenses and is usually repaid within the month

No, it’s unlikely your customers will be notified if you use invoice discounting. One of the core features of invoice discounting is confidentiality, as opposed to invoice factoring, in which the lender chases your clients.

However, do consider how you would feel if your client did, for some reason, find out. If this makes you very uncomfortable, invoice discounting may not be a good idea. You could instead opt for a short term loan or a revolving credit facility.

Invoice discounting is generally a fast funding solution. While timelines vary, a fair average would be anywhere from a few hours to a few days.

That depends a lot on your business and the invoices you intend to put forward. Some lenders require applicants to have an annual turnover of a quarter of a million, others ask for more or less.

Invoice discounting is usually suitable for B2B businesses, since these are the types of businesses that raise invoices with delayed payment dates. Having over three year’s trading history could help support your case for eligibility, as this will demonstrate you have a track record of raising and collecting invoices, possibly making you look a little less risky in the eyes of the lender.

A strong credit score, either on a personal or business level, could further support your case. If you have a bad credit score, consider different ways to increase it so you can gain access to better borrowing terms.

To find out if you’re eligible for invoice discounting, simply fill in the form here and we’ll get back to you with more information.

Probably, but whether the impact will be negative or positive depends on several factors. On the one hand, taking out a debt you can afford and making regular payments on time can have a positive impact on your personal and company credit score. However, missed payments and even worse, defaults, can negatively impact your score and affect your ability to borrow in the future. That’s why it’s important to carefully consider how you will repay invoice discounting if your clients do not meet their payment obligations in time.