Understanding invoice discounting: a simple guide

Invoice discounting is a financial tool that can significantly improve cash flow for businesses, especially those that deal with long payment terms. In this piece, we’ll explore what invoice discounting is, its key features and benefits, how it works, and what businesses can benefit from it. We’ll also compare it with invoice factoring and explain what confidential invoice discounting is.

What is invoice discounting?

Invoice discounting is a form of borrowing used to improve a company’s cash flow. Essentially, it allows businesses to unlock the value of their outstanding invoices by borrowing money against them. This means that instead of waiting 30, 60, or even 90 days for customers to pay their invoices, businesses can – in most cases-  access up to 90% of an invoice value almost immediately.  In some cases they can access 100% of the value.  .

Key features and benefits

• Advance rates and improved cashflow: Businesses can typically borrow up to 90% (and in some cases 100% depending on the sector) of the value of their outstanding invoices and can immediately access these funds
• Control: Your business manages customer relationships and collections. You also have control over borrowing costs because you can choose when to draw down funds
• Confidentiality: In many cases, the customer is unaware that invoice discounting is being used.

• Growth support: Provides the cash flow needed to take on new projects and customers.

• Flexibility: The amount available to borrow grows in line with sales.

So how does it work?

Your business sells goods or services and issues invoices to your customers. You submit these invoices to the invoice discounting provider. The provider advances you a percentage of the invoice value, typically within 24 hours. Your business collects payment from your customers as usual. Once the customer pays the invoice, you repay the provider the amount advanced plus any fees, and you retain the balance.

What is confidential invoice discounting?

Confidential invoice discounting (CID) is a type of invoice discounting where the arrangement remains completely confidential. Your customers are not aware that you are using a financing arrangement, allowing you to maintain normal business relationships. This can be particularly important for businesses that want to project a strong financial position.

But what’s the difference between invoice discounting and invoice factoring?

While both invoice discounting and invoice factoring involve borrowing against invoices, there are key differences:

• Control and collection: With invoice factoring, the factoring company usually takes over the collection process and may interact directly with your customers. Invoice discounting allows your business to retain control over the collections process.
• Confidentiality: Invoice discounting is often confidential, meaning your customers do not know about the arrangement. In contrast, invoice factoring is typically more transparent to customers.
• Suitability: Invoice discounting is generally more suitable for larger businesses with established credit control processes, whereas invoice factoring can be beneficial for smaller businesses or those without dedicated credit control functions.

Invoice discounting is suitable for a wide range of businesses and also used for acquisitions, MBO/MBIs and refinances.  It can be a powerful tool for improving your business’s cash flow and supporting growth. It offers flexibility, confidentiality, and control, making it an attractive option for many businesses.

If you think invoice discounting might be right for your business or you’d like to learn more about how it works, please contact Stef Radymski or Nilima Begum.  Our team is ready to help you unlock the potential of your outstanding invoices and support your business’s financial health.