Invoice discounting

In plain terms

Invoice discounting is a way of unlocking the cash trapped in your unpaid sales invoices before your customers pay. A finance provider advances you a percentage of each invoice — often up to around 90% — within a day or two of you raising it. When the customer eventually pays, you receive the remaining balance minus the provider's fee.

The defining feature is that it is usually confidential: you keep running your own sales ledger and chasing your own customers, who need never know finance is involved. This distinguishes it from factoring, where the provider takes over credit control and customers pay them directly. Invoice discounting suits established businesses with a reliable accounts team and good-quality debtors.

Why it matters to your business

If you sell on credit terms — say 30, 60 or 90 days — your cash is constantly locked up in your debtor book. That gap is one of the most common causes of cash-flow strain in otherwise healthy companies. Invoice discounting converts that future money into working capital today, so you can pay suppliers, cover payroll, or take on bigger orders without waiting for customers to settle.

It is a form of invoice finance, and the facility grows with your sales: the more you invoice, the more funding becomes available. That makes it a natural fit for businesses scaling up. For irregular or one-off cash needs it can be heavier than a simple working-capital facility, so it is worth comparing against working-capital finance and a revolving facility before committing.

An example

A wholesaler invoices £200,000 a month on 60-day terms. That means roughly £400,000 is permanently tied up in unpaid invoices. With an 85% discounting facility, it can draw around £340,000 of that as usable cash. When customers pay, the advances clear and the balance flows back, less fees.

The wholesaler can now pay its own suppliers early to win discounts, fund a larger stock position, and accept bigger orders — all without waiting two months for each customer to pay.