Invoice Discounting Guide: Everything You Need to Know

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What Is Invoice Discounting?

Invoice discounting is an alternative type of small business loan that allows business owners to access advances on their outstanding invoices. Through this form of financing—also known as invoice financing—invoice discounting companies provide business owners with up to 90% of their outstanding invoice value.

When the customer pays their invoice, the invoice discounting company returns the remaining percentage of your invoice to you, minus their fees. The remaining sum (the invoice value, minus how much the invoice discounting company advanced you, minus the invoice discounting fees) will be all yours.

Is invoice discounting a suitable funding option for your business? Keep reading to learn more.

See If You Qualify for Invoice Financing

How Does Invoice Discounting Work?

We’ve covered the general idea behind invoice discounting and how it differs from invoice factoring, but now let’s dig into the details. What are the logistics of invoice discounting, and what will these logistics look like for your business should you decide to move forward with this form of financing? 

There are two main points you’ll need to take into account when deciding whether invoice discounting is right for your business: the cost of invoice discounting and invoice discounting terms. So, let’s look at these two tenants and what they could mean for your business.

The Cost of Invoice Discounting

Any business owner considering taking on this financing option should heavily consider the cost of invoice discounting. Invoice discounting costs will come in the form of the fees that invoice discounting companies charges. Invoice discounting fees will typically rely on the value of the discounted invoice, along with how many weeks outstanding the invoice is.

That is, invoice discounting rates are typically weekly percentages of the invoice value that your lender will charge you. And though your invoice discounting rates will be based on a number of factors, the best invoice discounting companies typically charge around 0.4%  to 1% weekly invoice discounting fees.

Invoice Discounting Terms

As you might have guessed, based on the weekly invoice discounting fees, invoice discounting repayment terms will be some of the quickest on the market. In fact, invoice discounting terms can be as short as a single week. That said, they can also stretch as long as six months.

All in all, though, invoice discounting terms will rely on how long your invoiced customers take to pay, and other than pushing your customers to fulfill invoices on time, you won’t have total control over how long your invoice discounting terms last—and, as a result, how much your invoice discounting costs.

The Advantages of Invoice Discounting

Now let’s look at the advantages of invoice discounting to determine whether it’s worth it for your business to use as a form of financing. 

Here are the most notable details about taking on invoice discounting to access advances for your business’s outstanding invoices. There a three notable advantages to choosing invoice discounting to fund your business:

Invoices Secure the Funding

This type of funding is a secured business loan that doesn’t require collateral because the invoice will act as a form of collateral to secure your debt.

The self-secured nature of invoice discounting means that it will be a less risky prospect for invoice discounting companies to lend to your business. This mitigated risk will show up in the other upsides to invoice discounting as well.

Easy to Access

Thanks to the lessened risk that invoice discounting poses for lenders, this type of invoice financing is an easy business loan to get. As you can tell from the top companies’ minimum requirements we highlighted above, you don’t need to be one of the most qualified or oldest businesses to secure invoice discounting.

For the most part, as long as you’ve got six months of business under your belt, you’ll be eligible to apply for invoice discounting.

No Third-Party Collections

Finally, in contrast to invoice factoring, invoice discounting won’t involve any third-party collections. You’ll remain in charge of your invoices with invoice discounting, so you’ll also be in charge of collections—or making sure that your customers fulfill their invoices on time.

If you decide to go with factoring over invoice discounting, then your factoring company will take over collections and interact with your invoiced customers. This can be a huge dealbreaker for business owners who prefer that their customers not know that they’re taking on financing, or for owners who want to control their client relationships.

The Disadvantages of Invoice Discounting

For all of the advantages that come with invoice discounting, it does have some pretty glaring imperfections. Consider these main disadvantages of invoice discounting to weigh your funding options properly.

Costly, Undetermined Fees

First and foremost, invoice discounting is going to be expensive. Invoice discounting fees can seriously add up because they are determined weekly. Even more, because invoice discounting costs will rely on how long it will take for your customer to fulfill the invoice, you won’t have total control over exactly how much your invoice discounting fees end up costing you.

Short Repayment Terms

Additionally, invoice discounting terms are some of the shortest on the market. And the shorter the repayment term, the higher the APRs. As a result of the sizable invoice discounting fees and the quick invoice discounting terms, invoice discounting rates will be remarkably high.

Invoice Discounting vs. Factoring

Now, many business owners looking for invoice discounting might be wondering about the difference between invoice discounting and invoice factoring. Well, there is one crucial distinction between invoice discounting and invoice factoring that you’ll need to keep in mind if you’re hoping to access financing secured by your invoices: While invoice factoring will involve third-party collections, invoice discounting won’t.

That is, through factoring, the lender will take control of the invoice, and they will be in charge of making sure your customer fulfills their invoice. On the other hand, with invoice discounting, you will remain in charge of ensuring your customer pays their invoice.

So, if you’re wondering how to decide between invoice factoring vs. invoice discounting, decide whether or not you’d prefer to remain the keeper of your invoices, or if you’re willing to hand them over to your lender. Keep this in mind as we discuss your options along with the advantages and disadvantages of invoice discounting below.

Top Invoice Discounting Companies

Now that we’ve covered what invoice discounting rates and terms look like generally, we’ll examine the specifics on a few companies offering such financing. Additionally, we’ll examine the kinds of borrowers these top invoice discounting companies are willing to work with.

Let’s look at the top two invoice discounting companies, and the fees, terms, and loan requirements they come with.

Fundbox

One of the very best invoice discounting companies is the alternative lender Fundbox. Fundbox offers invoice discounting based on data from an applicant’s accounting software. As a result, they’re able to provide borrowers with a credit decision in as little as three minutes.

  • Amounts: Fundbox can offer invoice financing of up to 100% of your outstanding invoice value—offering you anywhere from $1,000 all the way up to $100,000.
  • Fees: Fundbox will charge you weekly invoice discounting fees in the form of 0.5% to 0.7% of your original invoice value.
  • Terms: Fundbox can offer some of the longest invoice discounting terms on the market. Though they might not seem so lengthy, Fundbox’s three- or six-month repayment terms are remarkably long for invoice discounting terms.
  • Requirements: Does Fundbox sound like the perfect invoice discounting solution for your business? Well, you’ll need to make sure you’re eligible to apply with this invoice discounting company. To work with Fundbox, you’ll need:
    • To invoice your customers
    • To have at least three months of financial records in your accounting software
    • To have been in business for at least six months

    Unlike most other business lenders, Fundbox won’t require a minimum personal credit score or a minimum annual revenue.

BlueVine

Another top option for invoice discounting will be the online lender BlueVine. BlueVine brands their invoice-based product as “factoring,” which, as we discussed, is traditionally slightly different from invoice discounting.

That said, BlueVine’s factoring product, in practice, works almost exactly like invoice discounting thanks to one crucial detail: BlueVine won’t take over collections of your invoice. They’ll simply have your customers pay you through your BlueVine dashboard.

As a result, BlueVine factoring works much like invoice discounting, so we suggest any business owner looking for invoice discounting companies should consider BlueVine a top option. Let’s take a look at the details on BlueVine’s financing product.

  • Amounts: BlueVine is willing to offer invoice discounting of 85% to 90% of your outstanding invoice value. You can receive up to $5 million for an invoice.
  • Fees: As for the invoice discounting fees that BlueVine will charge for their financing, be prepared to pay anywhere from 0.25% to 1% of your financing amount for every week your customer takes to fulfill their invoice.
  • Terms: BlueVine’s invoice discounting terms will be a good deal shorter than Fundbox’s—you’ll only have one to 12 weeks to repay your BlueVine funding. In fact, BlueVine will only agree to provide invoice discounting for invoices that are less than 12 weeks outstanding.
  • Requirements: BlueVine only requires three months of business history to be eligible for funding from them. Plus, you’ll only need a personal FICO credit score of at least 530 and at least $10,000 in monthly revenue to be eligible. That said, BlueVine factoring will only be available to businesses with a B2B model, so any small businesses working with a B2C model won’t be eligible.

The Bottom Line

If, after reading this guide, you think invoice discounting is the right funding option for your business, you now have the tools at hand to decide where to go next. Remember to weigh the advantages and disadvantages when deciding on this type of funding and closely review the financing terms before agreeing to anything.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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