Invoice Discounting: How It Works, Costs and the Best Providers in the UK

If your business is growing but you are constantly short of cash and playing catch up, invoice discounting can be one of the most effective ways to unlock working capital. It’s flexible, often confidential and designed to help businesses that are experiencing growth.

In this guide, we’ll break down how invoice discounting works, what it costs and look at the best invoice discounting companies in the UK right now.

Invoice discounting is designed to help companies that work on a B2B basis (business to business) release cash that is tied up in unpaid invoices – often within 24 hours.

Instead of waiting 30, 60 or 90 days to get paid, a lender advances you up to 90% of the invoice value. Immediately. When your customer pays the invoice, you receive the remaining balance minus any fees.

Invoice discounting is ideal for businesses that:

• Sell to other businesses on credit terms
• Have reliable customers
• Need cashflow for growth, supplier payments, payroll or just to iron out lumpy cashflow
• Have robust credit control processes already in place
• Want a confidential facility so that their customers don’t know about the finance arrangement

If you only need to fund individual invoices rather than your whole ledger, you may also want to read our guide on selective invoice finance.

1. You carry out your work as normal and raise an invoice.
2. You upload the invoice to your provider. Many providers now integrate with accounting software like Xero, Quickbooks or Sage so this is done automatically.
3. You draw down up to 90% of the invoice value. You are free to draw down the amount you require. You don’t need to draw the full amount.
4. You carry out your usual credit control. You are still expected to carry out credit control and ensure your customer pays.
5. Your customer pays the invoice. They pay into a trust account which is in your business’s name (so the facility remains confidential).
6. You receive the remaining balance. On payment of the invoice, the lender releases the remaining 10% balance, less their fees.

Typically, there are two fees charged by invoice discounting companies:

1. Service fee
2. Discount fee (the cost of borrowing)

These fees are based on a number of factors, including:

• Your turnover
• Volume of invoices going through the facility
• Number of customers
• Customer quality
• Your industry risk
• Risk profile of your company

There may also be a cost for Bad Debt Protection (BDP) which may be added onto the facility. This depends on the quality of your customers.

• Improved cashflow
• As your business grows, your facility can grow in line with increased turnover
• Lower costs than short term loans or revolving credit facilities
• You keep credit control in house
• Can be confidential

• Concentration limits. If any of your debtors are above a pre-agreed percentage of your turnover, then funding to them could be restricted. In these cases, a different type of facility may be more appropriate.
• Minimum fees. Most lenders will typically charge a minimum fee each month, even if you don’t use the facility.
• Personal guarantees are generally needed. These will often be capped though.
• You must always ensure your ledger is clean and up to date.

Invoice discounting and invoice factoring are both forms of invoice finance but they work differently. The table below sets out the key differences:

Not sure which is right for you? Read our full guide: Invoice Factoring vs Invoice Discounting: Which Is Right for Your Business?

That’s a very subjective question. It all depends on you and your business. Invoice discounting companies range from major high street banks (RBS and Lloyds for example), through to challenger banks (Aldermore and Metro for example) through to independent providers (Bibby, Novuna or Time Finance to name a few). The important thing is to work with a lender that is right for you. They need to:

• Understand your business and the sector you work in
• Understand your plans
• Understand and be comfortable with any issues in your business
• Offer the right size facility for you

What is right for one lender may be an instant decline for another.

Part of our job at Finance My Business is to work with you to find the right lender for you. We’ll make the job easier by discussing everything with you and then targeting the invoice discounting companies that will be the best fit for you.

1. Is invoice discounting the same as invoice factoring?

No. Invoice discounting is normally confidential and you do your own credit control. Invoice factoring is disclosed and the lender chases invoices on your behalf. Read our full comparison guide for more detail.

2. How quickly can I access funds through invoice discounting companies?

If you are new to market, then setting up a facility can be done in a couple of weeks. Once the facility is in place, you can then access funds within 24 hours of uploading the invoice. Many lenders can fund on the same day, depending on what time of day the invoice was uploaded.

3. What businesses qualify for invoice discounting?

Invoice discounting is ideal for:

• Established businesses selling B2B on credit terms
• Businesses with an annual turnover of £500k+
• Businesses with good quality customers who pay on time
• Businesses that require a confidential facility

If your turnover is lower or you only need occasional funding, selective invoice finance may be a better fit.

4. Does invoice discounting affect my customer relationships?

No – invoice discounting is designed to be confidential. You handle day to day credit control and retain your usual communication with customers.

5. When is invoice discounting not suitable?

Invoice discounting companies like to see well managed, clean sales and creditor ledgers. If many of your customers pay well beyond terms, then invoice discounting companies will normally want to do the credit control and will offer invoice factoring. If you have other underlying issues (like HMRC debt or other creditor pressure), then factoring might be more appropriate.