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What Is Invoice Discounting?
Invoice discounting allows a business to take a loan against its unpaid invoices from a financial institution (usually a bank or a discounting firm). The financial institution lends up to 95% of the total invoice value in advance for a fee.
The remaining invoice payment is collected from customers by the business. Invoice discounting is also known as invoice financing.
The key difference between invoice discounting and invoice factoring is who collects invoice payments from customers. In Invoice discounting, the business is responsible for collecting and handling payments whereas, in invoice factoring, the financial institution bears the responsibility.
How Does Invoice Discounting Work?
Invoice discounting works in 4 simple steps:
Sell goods & services: You sell your goods and services to customers and generate invoices as usual.
Invoice discounting agreement: You enter into an agreement with the discounting firm that verifies your unpaid invoices.
You get the money: The discounting firm lends up to 90% of the invoice value upfront at a discounted rate. You can use this money to fuel business growth.
Payment collection: In invoice discounting, the business collects invoice payments from the customers and bears responsibility in case of non-payment.
Other types of factoring:
Spot Factoring enables a business to sell individual invoices selectively. This type of factoring allows businesses to choose which invoices to factor based on their cash flow needs. It is also known as single invoice factoring or selective invoice factoring.
Debt factoring, also known as receivables factoring or invoice factoring, involves a business selling its accounts receivable (unpaid invoices) to a third party. The factoring company buys these invoices at a discounted rate, providing immediate cash to the business.
In recourse factoring, the business that sells its invoices to the factoring company remains liable if the customer fails to pay the invoice. If the customer defaults, the business must buy back the invoice or replace it with another. The risk of non-payment remains with the business.
With non-recourse factoring, the factor assumes the risk of non-payment by the customer. If the customer fails to pay due to insolvency or credit issues, the factor absorbs the loss, and the business is not responsible for repayment.
The term account receivables factoring is used interchangeably with invoice factoring. It involves the business selling its unpaid invoices (account receivables) to a third party at a discounted rate to receive early payments. Upon receiving the invoices, the factoring company releases the bulk of payments, usually up to 90% of the collective invoice value). The rest is paid (after fee deduction) when the payment is collected in full from the end customers.
Sectors That Invoice Discounting Covers
Retail
Mechanics
Restaurants
Bars & Clubs
Leisure Clubs
Plus Many More
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How invoice discounting can help your business
Invest in stock, HR, & equipment
Access capital for essential business needs.
Focus on High-Value Operations
Free up time by outsourcing collections.
Improve Cash Flow
Convert unpaid invoices into immediate funds.
Fuel Growth
Use funds to expand, and invest in stock, HR, or equipment.
Is Invoice Discounting Right For Your Business?
Need instant cash
Is your business experiencing cash flow problems due to late payments? Invoice discounting is an easy and quick way to inject cash into your business.
Monthly turnover £4,000+
Invoice discounting is best suited for businesses that sell on credit and have a turnover of £4,000+ per month.
Customer Relationship is important
The payment collection process remains under your control in invoice discounting as compared to invoice factoring, in which the third party collects and manages invoice payments. If you value your customer relationship and brand image, invoice discounting could be a better option for you.
Invoice discounting FAQs
The key difference between invoice factoring and invoice discounting is:
- In invoice discounting, a business borrows money against its unpaid invoices from a third party at a discounted rate, without selling the invoices. The responsibility to collect payments for the invoices remains with the business.
- In invoice factoring, a business sells its invoices to a third party for immediate cash flow. The factoring company takes responsibility for collecting and managing payments from customers in this case.
Invoice discounting is another name for invoice financing. Both involve using unpaid invoices as collateral for obtaining funds from a third party. The business then collects the customer payments for the invoices and pays back the invoice finance provider the borrowed sum plus an additional fee.
When it comes to invoice discounting, ComparedBusiness is here to help you save time and money. You can easily submit your business requirements through ComparedBusiness in under 2 minutes.
You will get quotes from top Invoice Discounting companies delivered to your email. You can then compare and choose the most suitable option per your business needs.
Yes, invoice discounting is confidential. Your customers won’t know that you’re using this service since you are on the front end, managing the bills and payment collection as usual.
Yes, startups can use invoice discounting, but they usually need to have a consistent flow of invoices and a decent credit history. It’s a great option for new businesses looking to improve cash flow quickly.
Invoice discounting is ideal for businesses that sell on credit and have unpaid invoices. It’s commonly used by businesses in sectors like manufacturing, retail, and services where there are long payment terms.
With invoice discounting, you can typically receive up to 95% of the invoice value upfront. The exact amount depends on the agreement with the financial institution, so it can vary anywhere between 90 and 95%.