Factoring and invoice discounting

Invoice discounting

Guide

Invoice discounting is an alternative way of drawing money against your invoices that allows you to retain control over your sales ledger. It can provide a cost-effective way to improve your cashflow.

Invoice discounting is only available to businesses that sell products or services on credit to other businesses. It is normally only available to businesses with a proven track record and an annual turnover of at least £500,000. 

It may not necessarily be the cheapest form of finance available and can tie you into a long contract.

How invoice discounting works

The invoice discounter will want to visit your business, review your finances and study your business plan to evaluate your suitability for invoice discounting.

You will pay a fee to the invoice discounter and they will be notified of the invoice details electronically - through downloads of sales day books or invoice listings.

Once they receive notification, the invoice discounter will make funds available at the agreed percentage rate. As cash is received from debtors, it is paid to the invoice discounter, reducing the outstanding balance and making the remaining amount available.

You're not required to inform your customers you are using invoice discounting, as you still collect the debts and do the credit control.

Selective invoice discounting

Selective invoice discounting is only offered by a few financial providers, and allows you to choose individual invoices or customers for discounting. You will receive funding on an invoice-by-invoice basis.

Fees for selective invoice discounting are higher, but it can be more cost-effective as you won't need to process all invoices through the facility.

There are a number of benefits of using selective invoice discounting, including:

  • greater flexibility - you only pay fees for invoices you use
  • quick funding - the process often allows providers to complete within days
  • open contracts without long term ties
  • no leaving fees for ending an agreement
  • as with invoice discounting, you still manage debtors' accounts and can maintain business relationships

You should not enter into any selective invoice discounting agreement if you are in dispute or facing queries from a customer or debtor.