Invoice Discounting Guide: Everything You Need to Know

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.

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.

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.

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.

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:

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.

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.

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.

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.

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.

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.

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.

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.