Invoice finance is a handy solution for businesses that suffer from cash flow gaps, caused by lengthy payment terms or seasonal fluctuations. However, there are several types of invoice finance, each suiting different needs and preferences. Invoice discounting is typically the more discreet version, which allows businesses to retain greater control of the process.

In this article, we outline the benefits of invoice discounting, how it works and what to consider when judging suitability for your business.

What is invoice discounting?

Invoice discounting is a type of invoice finance in which the business seeking capital is responsible for invoice payment chasing and collection. As with other forms of invoice finance, this form of funding enables businesses to access capital tied up in unpaid client invoices to use for various purposes and minimise cash flow problems. 

So, rather than waiting weeks or months to be paid by your customers, an invoice finance provider advances you the vast majority of the money owed (usually within 24 hours), for a small charge and ‘discount fee’ taken off the remaining amount, once the invoice payment arrives.

As 3 in 5 small businesses in the UK struggle with the impact of late payments, according to 2025 research from QuickBooks, invoice finance can provide fast access to crucial funds.

How does invoice discounting work?

Invoice discounting can be viewed as a form of short-term business loan, where you use the unpaid invoices as security. In invoicing finance, you’re essentially ‘selling’ upcoming/unpaid invoices to a finance lender in return for a cash advance of a percentage of their value. You’ll receive between 80 and 95% of invoice value upfront, depending on the lender, your situation and your clients’ creditworthiness. 

Once your customers pay the invoices, you receive the remaining balance, minus the lender’s commission (usually around 0.5% of the invoice value) and the equivalent of interest incurred on the outstanding money, which is referred to as the discount fee. Discount fees are typically charged at 2-4% above the Bank of England (BoE) base rate. This is applied to the remaining amount that businesses will receive until the client has paid the invoice. 

Fees and rates vary between providers, but typically, businesses end up getting over 95% of the overall invoice amount once all fees have been taken and the client has made the invoice payment.

Unlike invoice factoring, where the provider chases and collects client invoice payments, with invoice discounting, you have that responsibility, with payments going into a specific account monitored by the lender (but in your company’s name).

What type of businesses use invoice discounting?

Invoice discounting is often used by either SMEs with inconsistent revenue or cash flow (such as retailers or hospitality companies) or businesses in industries like construction, manufacturing, wholesale, logistics and professional services, where there are lengthy payment schedules. 

To address cash flow gaps caused by the long wait for payments, using invoice discounting unlocks key working capital to cover key expenses and keep your business operations running smoothly.

What types of invoices can be discounted?

Invoice discounting is for advancing B2B payments from creditworthy business customers. Unlike most other forms of business finance, eligibility is largely based on your clients’ risk level. Invoice finance brokers and lenders will provide funding for invoices for completed, undisputed goods or services.

Invoice discounting vs factoring

If you’re interested in invoice financing, choosing between invoice factoring and invoice discounting depends on what they’re comfortable with, in terms of the level of control and administration involved in each option. 

The main difference is that with invoice discounting, your company is responsible for chasing and collecting payments, while when using invoice factoring, the finance provider takes that responsibility. In the latter’s case, this saves you time and effort, but it does mean your clients are aware that a third party is involved. Ongoing use of this facility means allowing the provider control over your sales ledger. 

If you’d prefer to keep control and discretion over the process, you’ll likely want to use invoice discounting. The lesser involvement of the provider also means service fees are typically lower than with invoice factoring. 

Will my customers know I’m using invoice discounting?

As mentioned, invoice discounting is a more discreet financing option. In confidential invoice discounting, your customers usually won’t know you’re using the service, as your business is the one still chasing and collecting their payments. However, there are cases of invoice discounting when clients will pay the provider directly.

In invoice factoring, your customers will be aware you’re using the finance facility, as they manage invoice collection and the money owed is paid into an account controlled by the factoring company.

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Invoice discounting advantages and disadvantages

Let’s summarise the main pros and cons of invoice discounting to help you understand the benefits and potential drawbacks of this form of finance:

Advantages of invoice discounting

• Gain quick access to cash tied up in owed invoices.
• Maintain discretion, easing fears over client relationships.
• Stay in charge of the credit control.
• More regular cash flow if using invoice discounting as a continuous facility.
• Greater ability to meet goals, targets and execute key business investments
• Better capabilities to meet periodic liabilities, such as tax bills and payroll. 
• Less burden of debt than many other funding solutions.

Disadvantages of invoice discounting

• Unlike invoice factoring, you remain responsible for time-consuming invoice payment chasing and collection.
• Whilst you get fast access to capital, you still have to wait for the full amount later down the line, minus fees.
• Some invoice finance facilities, particularly for ongoing financing, required an upfront set-up fee (ranging from £500 to £2,500, depending on business size and complexity of integrations, etc.).

Disclosed and confidential invoice discounting

One of the contentious areas of invoice financing is whether it can give customers the impression of having financial difficulties. However, most industries where invoice financing is used understand the challenges of lengthy payment schedules and the cash flow issues this can cause.

Invoice discounting is usually the method to use if you don’t want to disclose that you’re using this form of finance. In confidential invoice discounting, your customers continue to pay you directly, and you remain responsible for chasing and collecting payment and repaying what you owe to the provider. Alternatively, payments are transferred to an account set up in your name but managed by the provider.

Keeping it confidential may ease your concerns over perception and control, but it’s often only offered to larger, more established companies. 

Disclosed invoice discounting involves your customers paying the lender, which is usually more expensive due to the extra administration involved.

Recourse and non-recourse invoice finance

This relates to who is responsible if clients don’t pay the invoices. With a recourse facility, you’re liable for the costs of any unpaid customer invoices. In a non-recourse facility, the lender absorbs the cost of any unpaid invoices.

Due to the higher risk in non-recourse invoice finance, you’ll be subject to higher rates. So, consider the strength of your client relationships and their reliability regarding payments, plus your own risk appetite.

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Invoice discounting costs

The main costs involved with invoice discounting are the service fee and the discount fee. However, depending on the lender and the scale of your invoice financing needs, you may need to pay a set-up fee, plus other charges, like early termination fees. 

Costs will vary between invoice finance providers and are influenced by your business circumstances, so do extensive research and check provider terms.‍

• ‍Service fee: This is the cost of having the credit agreement in place and covers the management and administration of your account. It’s often calculated as a percentage of your turnover. And as your turnover changes, so can this fee. In invoice discounting, it should be no more than 0.5% of an invoice’s value.
• ‍Discount fee: Similar to the interest on a loan, this is to cover the cost of borrowing and the wait for the receipt of invoice payments. It’s usually a few per cent of each invoice that you receive an advance for, but it’s affected by how long it takes for your customers to pay their outstanding invoices.‍
• Set-up costs: Large-scale invoice financing arrangements usually require a set-up fee for getting it in place, integrating with your accounting systems and conducting due diligence. This can widely vary, but is often between £500 and £2,500, when required.

What are the other types of invoice finance?

Invoice factoring

As discussed earlier, in invoice factoring, the lender looks after the credit control, and your customers will be aware you’re using an invoice company, unlike with confidential invoice discounting. It removes a lot of the administrative burden, but doesn’t offer the discretion that invoicing discounting provides.

Selective invoice finance

Following the same principles as invoice discounting and factoring, selective invoicing differs in that you can choose specific client accounts you want to finance, rather than covering all your incoming invoices. As this is more targeted and flexible, it tends to be less readily available than invoice discounting or factoring.

Invoice trading

With invoice discounting and factoring, you usually enter a long-term agreement. In invoice trading, you upload an individual invoice to an online platform stating the amount, advance rate, maximum cost of finance and the term (for client payments).

It’s a form of peer-to-peer lending where registered buyers on the platform bid for your invoice based on this information, details on you and your clients’ backgrounds, plus the transaction itself.

Which form of invoice finance is best suited to your business needs?

This depends on various factors, such as your usual payment schedule for customer invoices, whether you need the facility ongoing for a temporary period, plus how much control over the invoicing process you want to retain. Also, the lenders will consider your trading history, turnover and other factors, such as your clients’ creditworthiness, before offering you the service.

So, consider your specific needs, preferences and eligibility before choosing which form of invoice financing is right for your business. 

Alternatives to invoicing discounting (and invoice finance in general)

You may also consider looking at finance options beyond invoice financing. While it’s a fast way to access working capital, you may want more flexibility or a solution that offers access to larger sums of money. 

Here are a few alternatives to invoice discounting (and other invoice financing):

Lines of credit

A business line of credit is a sum of working capital from which to draw down and use, as and when required, which is repaid over a pre-agreed period, with options to top-up and continue to draw from ongoing. 

Merchant cash advances

This revenue-based finance option is ideal for retailers and online businesses. Using a merchant cash advance means getting a loan to repay as a percentage of future card sales, rather than a standard set of monthly repayments. 

Business loans

If your business needs a lump sum of capital to use for an array of uses, from funding expansion plans and purchasing new equipment to managing other liabilities, such as corporate tax bills, then a business loan may be more suitable

There are several types available from various UK lenders, which can be secured or unsecured loans. 

While loans from high street banks and traditional lenders can have a lengthy application and approval process, there are many alternative and digital lenders, like iwoca, which provide flexible business loans with hassle-free online applications. With iwoca, you can get approval decisions within 24 hours and access to funds on the same day. 

Invoice discounting FAQs

If you have further questions about invoice discounting, check out our FAQs below, which may help clarify your queries:

When should I consider using invoice discounting?

If you have regular cash flow challenges resulting from long waits for client invoice payments, invoice financing is certainly worth considering. Invoice discounting is ideal if you want fast access to the capital in advance while still retaining control of invoice chasing and collection. This means the finance solution has little impact on existing client relationships and invoicing processes. 

Can invoice discounting help with late-paying customers?

Yes. One of the main purposes of invoice discounting is helping businesses impacted by late-paying customers by enabling them to access the funds sooner to plug any cash flow gaps. It may not stop customers from paying late, but it’s a reliable workaround to prevent it from impacting your operations.

Does invoice discounting affect customer relationships?

Invoice discounting shouldn’t affect customer relationships, especially if you use confidential forms of this financing method. However, even if your customers are aware of the use of invoice finance, the process is smooth, and you remain in control of the process, with customers paying you as usual. 

What happens if a customer doesn’t pay the invoice?

While your business is usually still responsible for repaying the funds advanced by the invoice finance provider, if a customer doesn’t pay an invoice, there are non-recourse agreements you may be able to secure. In these cases, the lender assumes the risk of non-payment. These agreements are subject to stricter eligibility requirements and often come with higher fees.

Can invoice discounting affect my credit score or future borrowing?

As invoice discounting is not traditional debt finance and due to client creditworthiness being the main factor for approvals, it shouldn’t impact your credit score. However, as with any business financing, responsible use of the facility is key. Defaults on payments from your clients will affect your cash flow and ability to repay what you owe lenders, which can have knock-on effects on your credit score.