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What Is Invoice Discounting? And Should You Use It?

discount iconBy now, you know that Invoice Finance could be a good solution for your business, but you begin to wonder what are the differences between each Invoice Finance product? How do you know if your business is more suitable for Invoice Discounting or Factoring?

This article is your one-stop shop for Invoice Discounting.

You will find everything you need to know starting from how Invoice Discounting works, its advantages and disadvantages, to whether you should use it.

So, let’s get rolling!

In this guide you will find


Introduction to Invoice Discounting


Invoice Discounting, also known as Confidential Invoice Discounting, is an undisclosed Invoice Finance solution for B2B companies that unlocks the value of your invoices, while you remain in control of your debtor ledger and collections.

As a result, the eligibility requirements for Invoice Discounting are higher in terms of minimum annual turnover, trading history, and in-house standards of credit control and collections. Providers are more likely to approve your business for Invoice Discounting if you demonstrate business stability and success, as these are indicators of your ability to manage your own credit and collections process.

Invoice Discounting differs from Factoring because the service is entirely confidential, which means your customers won’t know and your provider doesn’t communicate with them. You are able to continue working on your customer relationships without the interference of a third party.

Invoice Discounting is the most popular Invoice Finance solution in the UK.

In fact, from the £151 billion in Invoice Finance sales made between June 2016 and June 2017, £127 billion came from domestic Invoice Discounting. It tends to be lower cost than Invoice Factoring, and gives you more independence to run your own credit management and collections.

Here are the key takeaways of this article:

  • Invoice Discounting is suitable for medium to large businesses with a stable trading history
  • Invoice Discounting gives you access to 80-95% of your invoice value within 24 hours, while leaving you in control of your credit management and collections.
  • Invoice Discounting tends to be lower cost than Factoring because you use a lower level of service from your provider.
  • Since you control your own credit and collections, you have to liaise more with your provider in order to continuously update them on status of your debtor ledger.


How Does Invoice Discounting Work?


First off, let’s break down the process of Invoice Discounting.

After you’ve successfully applied for Invoice Discounting, your provider begins advancing funds from your verified invoices. You raise invoices to customers for your products and services, as you normally would, and then submit copies of these invoices to your provider. Within 24 hours, you receive the primary cash advance, which is typically 80% to 95% of your invoice value.

Unlike loans and overdrafts, Invoice Finance uses your invoices as collateral, which means your other assets are safe.

Your relationship with your provider is completely confidential to your customers, who have no contact with your provider. They remain unaware that you have received a working capital advance against their invoices before the invoice due date, which ensures that your customer relationships run smoothly.

Although you handle your own collections, your provider opens a bank account in your name, which customers use for their invoice payments. Thus, Invoice Discounting becomes much more efficient since you don’t incur further costs by transferring invoice payments from your personal business account to your provider.

In general, Invoice Discounting is whole-turnover. What this means is every invoice in your sales ledger is sold to the provider and discounted.

If you prefer to only discount particular invoices, then some providers also have the option to use Selective Invoice Discounting.


What are the Costs of Invoice Discounting?


For the most part, Invoice Discounting is cheaper than Factoring because you are using a lower level of service. You manage your own debtor ledger, credit control, and customer collections, as opposed to outsourcing these tasks to your provider.

The main cost of Invoice DIscounting comes from using the facility itself, or in other words, the cost of providing the advanced working capital against your invoices.

Invoice Discounting is primarily comprised of two costs: the discount charge – an interest on the money advanced, and service charge – the cost of running your Invoice Discounting facility. These two costs will also be affected by your invoice volume, size, industry, and business stability.

What’s more, your service charge should also be smaller, since you are using a lower level of service than businesses that use Invoice Factoring.

For Invoice Discounting, discount charges are typically 1% to 3% over the base interest rate, while service charges are 0.2% to 0.5% of your annual turnover.

Depending on your provider and contract, you will also be charged different additional costs such as minimum usage fees, transaction fees, and other administrative charges.


Invoice Discounting Advantages and Disadvantages


Invoice Discounting offers many of the same benefits as Invoice Factoring, such as faster access to working capital, improved cash flow, and opportunity for business growth. The independence you have to manage your own credit control functions and customer collections is the main difference between Invoice Discounting and Factoring, which comes with certain advantages and disadvantages.

For instance, when you carry out these tasks in-house you are able to maintain customer relationships and have confidentiality from your customers. You control how your business is run, while paying lower fees than Invoice Factoring!

On the other hand, your independence comes with a high level of responsibility. You need to keep your debtor ledger consistently updated, make sure customers pay their invoices on time, and regularly liaise with your provider which can take valuable time away from you focusing on your business.

Here’s a useful outline of the advantages and disadvantages of Invoice Discounting:

Invoice Discounting Advantages Invoice Discounting Disadvantages
  • Improves of cash flow and reduces working capital constraints
  • Ultimately receive an amount less than the total invoice value due to discount rate and other fees
  • Confidential
  • Have to liaise between provider and your own debtor ledger in order to keep them updated
  • Provides fast funds to cover business expenses and make new investments
  • Generally, Invoice Discounting is not an option for B2C businesses
  • Receive funds within 24 hours of raising invoice
  • Additional fees that can add up
  • Cheaper than Invoice Factoring
  • Increased risk from responsibility of handling own credit control and collections
  • Opportunity for business growth as available funding grows with your business
  • Using in-house facilities to manage credit and collections may take time away from focusing on your business
  • Independence to manage own credit control and collections
  • Maintain your customer relationships
  • Additional Bad Debt Protection is offered


Should You Use Invoice Discounting?


So now that you know more about Invoice Discounting, let’s figure out if it’s the right solution for you.

Invoice Discounting providers often use four main variables to determine your suitability:


  • In-House Capabilities
  • Annual Turnover
  • Business Stability
  • Invoice Credit Terms


These indicators give Invoice Discounting providers more insight into your compatibility with their Invoice Discounting solution.

Unlike Factoring, Invoice Discounting is more suitable if your business is already relatively successful with established processes for credit control and collections.


In-House Capabilities

If you want to use Invoice Discounting, you need to demonstrate that your business has a sufficient in-house credit control department and is able to handle customer collections appropriately.

Although this often disqualifies small to medium businesses that don’t have dedicated in-house credit control departments, it is not necessarily a negative consequence. Most SMEs are still in the growth stage and will benefit from outsourcing their credit management to an Invoice Finance provider.


Annual Turnover

In general, Invoice Discounting providers set a higher minimum annual turnover compared to that of Invoice Factoring. This minimum annual turnover requirement ranges between providers, but is normally between £250,000 and £500,000.

Businesses with higher turnovers and a large client base demonstrate an adequate level financial stability, and are more likely to have the ability to properly manage in-house credit control and collections.


Business Stability

You also need to have a good track record of business stability in order to support your desire to internally manage your credit control and collections. Invoice Discounting providers normally require a minimum of 2 years trading history and demonstrated financial viability for 6 consecutive months.


Invoice Credit Terms

In order to qualify for Invoice Discounting (and other Invoice Finance solutions), providers normally require the credit terms of your invoices be between 30 and 90 days. A few providers will consider invoices with longer payment terms of up to 120 days, but these may be more expensive as the provider has to wait longer to receive their repayment.

Fact: The average number of debtor days outstanding for Invoice Discounting in the UK is 56.7 days, and is longer than Invoice Factoring.


Top Invoice Discounting Providers in the UK


In the UK, there are over 50 Invoice Finance providers, brokers, and intermediaries that offer Invoice Discounting solutions.

They are either independent companies, subsidiaries of financial institutions, or crowdsourcing platforms. Each provider has different eligibility criteria and costs.

Here’s a comparison of the Invoice Discounting requirements between five of the top providers in the UK: Bibby Financial Services, Hitachi Capital, Lloyds Commercial Finance, MarketInvoice, and Touch Financial.

Invoice Discounting Provider Minimum Annual Turnover Business Stability Invoice Credit Terms
Bibby Financial Services Not stated At least 6 months financial viability 30 – 90 days
Hitachi Capital £250,000 Not stated Up to 120 days
Lloyds Commercial Finance £250,000 Not stated Up to 90 days
MarketInvoice £500,000 or £250,000 with additional credit control purchase 2 years or 1 year with additional credit control purchase Not stated
Touch Financial (broker) £350,000 Not stated Varies

Bibby is the largest independent Invoice Finance provider in the UK, Touch Financial are a trusted Invoice Finance brokerage, MarketInvoice is the first online Invoice marketplace, and Hitachi and Lloyds are both part of large financial institutions.

Their basic Invoice Discounting requirements aren’t that different from one another, but it should be noted that these are just guidelines. Just because you qualify for their eligibility criteria, does not necessarily guarantee that the provider will judge your business to be suitable for their Invoice Discounting solution.


The Bottom Line


So what’s the bottom line?

Invoice Discounting is by far the most popular Invoice Finance solution in the UK.  It provides a high level of flexibility, while allowing you to independently manage your own credit control and collections.

But it’s not for everyone.

Think carefully about whether you are able to comfortably handle these responsibilities on your own. Sometimes, it’s not worth saving a couple extra pounds if it means that you are taking on a larger burden than you can manage.

On the other hand, if your business is capable enough to have an in-house credit control department that’s been tried and tested, then Invoice Discounting is a great option!

Try it out and you’ll see why in 2016-2017, 84% of Invoice Finance sales came from Invoice Discounting alone.


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