A business turning over £2m a year on 60-day terms carries, on average, about £330,000 of unpaid invoices at any moment. Invoice discounting lets a company with a competent finance function borrow against that ledger without handing its customer relationships to a third party.
What is invoice discounting?
Invoice discounting is a form of invoice finance in which a provider advances a percentage of a business's outstanding sales ledger, typically 70% to 90%, while the business continues to run its own credit control and collect payment from customers. It is usually confidential.
The contrast with invoice factoring is the service element. A factor chases your customers; a discounter does not. That is why discounting costs less in service fees, why it is normally confidential, and why providers want evidence that your credit control is already good. You are, in effect, asking a lender to rely on your collections process rather than its own. Both products sit within invoice finance.
How invoice discounting works
Discounting is a facility against the ledger as a whole rather than invoice by invoice. The day-to-day mechanics look like this.
The trust account
The provider opens a bank account in your business's name that it controls. Your customers are given these details as your remittance account and pay into it exactly as they would pay you. Nothing on the invoice signals that a lender is involved.
Ledger upload and drawdown
You send the provider a schedule of invoices raised, typically through an upload from your accounting software, daily or weekly. Availability is recalculated and you draw what you need to your main account.
Receipts and reconciliation
Money arriving in the trust account is swept to the provider and applied against your drawn balance. You allocate the same receipts in your own ledger, and the two must reconcile.
Monthly reporting
Each month you submit an aged debtor report, sales and credit note totals, and a reconciliation between your ledger and the provider's. Periodic audits, often quarterly or twice a year, check that the figures hold up.
The reconciliation step is where discounting differs most from factoring in practice. Because the provider is not seeing every invoice and every call, it relies on your reporting being accurate and prompt. Late or inconsistent reconciliations are the commonest reason a facility is restricted or converted to a disclosed one.
Confidential vs disclosed invoice discounting
Confidential invoice discounting
Customers are not told. They pay a trust account in your name and credit control continues as normal. Offered to businesses with audited accounts, strong systems and a track record. Read more about confidential invoice discounting (CID).
Disclosed invoice discounting
Customers receive a notice that invoices are assigned to the provider and pay the provider's account, but you still manage collections. Providers use this where they want the extra protection of notification, for example with newer businesses or weaker ledgers.
A provider may also start a facility disclosed and move it to confidential once reporting has proved reliable, or do the reverse if covenants are breached.
Eligibility: what providers look for
Because the provider is not managing the ledger itself, it sets a higher bar than for factoring.
- Credit control quality: a dedicated credit controller or finance team, documented chasing procedures, and debtor days in line with your terms.
- Systems: accounting software that produces reliable aged debtor reports and can export the sales ledger. Spreadsheet ledgers are rarely accepted.
- Turnover: traditional whole-ledger discounting is usually aimed at businesses above £500,000, and many providers prefer £1m or more. The British Business Bank notes that a traditional facility is generally unsuitable below roughly £300,000.
- Financial strength: up-to-date, often audited accounts, a trading history of two years or more, and a balance sheet that supports a debenture.
- Ledger shape: a spread of creditworthy business customers, with no single debtor over roughly 25% to 30%, and invoices for completed work rather than stage claims.
Smaller or younger businesses that do not meet these criteria are usually offered factoring or a selective product instead. Our eligibility checker explains what helps.
Advantages and disadvantages
Advantages
- Lower service fee than factoring, because you do the collections work
- Confidential in most cases, so customer relationships are untouched
- Funding grows automatically with the ledger
- Flexible drawdown: borrow only what you need, when you need it
- Can replace an overdraft with a larger, sales-linked limit
Disadvantages
- You carry the full workload and cost of credit control
- Monthly reconciliations and audits add administration
- Higher minimum turnover and stricter financial criteria
- Usually recourse: unpaid invoices reduce availability
- Debentures, personal guarantees and covenants are common
What invoice discounting costs
The two main charges are the same as for any invoice finance facility, but the balance between them shifts. The service fee is lower than factoring, with published ranges of roughly 0.2% to 1% of turnover, because the provider is not running your ledger. The discount charge on funds drawn is similar, typically 1.5% to 5% a year over Bank of England base rate or SONIA, applied daily to the drawn balance. Arrangement fees, audit fees and minimum annual fees are common. Charges vary by provider and circumstances; see the costs guide for the full list.
Illustrative example A wholesaler invoicing £100,000 a month
- Invoices raised in the month
- £100,000.00
- Approved ledger (about 55 debtor days)
- £180,000.00
- Gross availability at 85%
- £153,000.00
- Average balance drawn during the month
- £150,000.00
- Service fee (0.5% of monthly invoices)
- £500.00
- Discount charge (6.5% a year on £150,000 for one month)
- £812.50
- Total monthly cost
- £1,312.50
Figures are illustrative estimates only and do not represent a finance offer. The cost is about 1.3% of monthly sales. The same ledger under factoring at a 1.5% service fee would cost roughly £1,000 more a month, in exchange for outsourced credit control. Try your own numbers in the calculator.
Think your ledger is ready for discounting?
Tell us about your turnover, systems and customers and we will explain whether discounting, CID or factoring is likely to be the better enquiry.
Invoice discounting vs factoring
| Feature | Invoice discounting | Invoice factoring |
|---|---|---|
| Who collects payment | Your business | The provider |
| Customer awareness | Usually confidential | Disclosed |
| Where customers pay | Trust account in your name | The provider's account |
| Service fee | Roughly 0.2% to 1% | Roughly 0.75% to 3% |
| Your administration | Ledger uploads, reconciliations, audits | Invoice uploads only |
| Typical minimum turnover | £500k or more | From around £100k |
| Suits | Established firms with strong credit control | Smaller firms wanting collections handled |
The full comparison sets out "choose discounting if" and "choose factoring if" criteria with a cost comparison.
Frequently asked questions
What is invoice discounting?
Invoice discounting is a form of invoice finance in which a provider advances a percentage of your outstanding sales ledger, typically 70% to 90%, while your business continues to run its own credit control and collect payment from customers. It is usually confidential, so customers are not told a finance provider is involved.
What is the difference between invoice discounting and factoring?
With factoring the provider takes over credit control and customers pay it directly, so the arrangement is disclosed. With invoice discounting you keep collecting payment, usually confidentially, and the provider only funds. Discounting carries a lower service fee but requires stronger systems and is normally offered to larger, established businesses.
What is a trust account in invoice discounting?
A trust account is a bank account opened in your business's name but controlled by the finance provider. Your customers pay into it exactly as they would pay you, which preserves confidentiality. Receipts are then swept to the provider to reduce the amount you have drawn, with any surplus made available to you.
What is the minimum turnover for invoice discounting?
Traditional whole-ledger invoice discounting is usually aimed at businesses turning over £500,000 or more, and many providers prefer higher. The British Business Bank notes that a traditional facility is generally unsuitable below roughly £300,000 of turnover. Smaller businesses are more often offered factoring or a selective product.
What happens if a customer does not pay under invoice discounting?
Most discounting facilities are recourse, so an invoice that remains unpaid beyond the agreed period, often 90 days past due, is removed from the funded ledger and the advance against it is effectively repaid from your availability. Bad debt protection can be added to cover approved customers against insolvency, subject to the terms of the cover.
Is invoice discounting confidential?
Usually, but not always. Confidential invoice discounting keeps the arrangement private: customers pay a trust account in your name and the provider stays in the background. Disclosed invoice discounting tells customers that invoices are assigned, while you still manage collections. Providers may require disclosure for younger or higher-risk businesses.