Invoice Discounting | 7 Advantages And Disadvantages

24-January-2024 13:24
in Commercial
by Sam Hodgson
Invoice discounting advantages and disadvantages

Invoice discounting is one of the two main types of invoice finance available for companies to leverage their accounts receivable and release funds early, but what exactly does invoice discounting do for you and is it right for your business? Let’s look in-depth at the pros and cons of invoice discounting.

In this blog:

Advantgages & Disadvantages of Invoice Finance

  1. Advantage - Releasing Your Locked Accounts Receivable Early

  2. Disadvantage - Nothing is Ever Free

  3. Advantage - Flexibility

  4. Disadvantage - The Reliance Trap

  5. Advantage - The Invisibility of Invoice Discounting

  6. Disadvantage - Bias for Larger Enterprises

  7. Advantage - Opening Up Opportunities

Alternatives to Invoice Discounting

Finding the Best Invoice Discounting 


Advantage #1 - Releasing Your Locked Accounts Receivable Early 

The main point of invoice discounting is, of course, to give you access to the funds you need without having to wait until your invoices are paid. 

The standard B2B model of work followed by invoice, followed finally by payment, strongly favours the client. If your business is rich in cash flow capital, then waiting thirty or sixty days for payment can be weathered easily. For companies without such luxury, it can be a challenging time and, for some, can even lead to collapse. 

The truth is, there is no real reason for it. Invoices should be paid on zero-day terms; after all, you have supplied the product or undertaken the services, so why are you waiting a month or more to be paid for it? 

Yet, in business, companies are expected to accept this model without question. For many, it leads to an unfair struggle as salaries need to be paid, equipment and supplies obtained, and debts serviced. Hence, invoice discounting. 

Invoicing discounting is a loan based on your accounts receivable (the amount owed to you in unpaid invoices) as collateral. It allows you to get immediate access to the money you know is coming in, without having to wait for painful invoicing terms to pass. 

There are two types of invoice discounting;

  • Full (or whole) invoice discounting, which becomes a line of credit type financing
  • Or part (selective) invoice discounting, which is closer to a more standard business loan. 

Looking for more information? Watch our short video below to learn about invoice finance in more detail.

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Disadvantage #1 - Nothing is Ever Free 

The biggest strike against invoice discounting is that it will cost you. Exactly how much that cost is will differ depending on the following factors: 

  • Whether you choose whole or selective invoice discounting 
  • The size of your company turnover 
  • The value of the invoices to be discounted 
  • The length of the loan term 
  • Your business sector
  • External factors (such as the current Bank of England base rate)

Whole invoice discounting is treated as an ongoing line of credit, coming with an administration fee as well as a discounting fee based on the loan size. The total amount of credit available to you will typically represent between 75% and 90% of your accounts receivable. 

Weighing the benefits between the cost of invoice discounting and the advantage of immediate access to the money is the main consideration when considering invoice finance. 

Our experts can guide you through the process, ensuring seamless access to working capital. Experience financial flexibility and expedited funds with our reliable services.

Contact us today to embark on a journey towards greater financial efficiency and business growth.

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Advantage #2 - Flexibility 

Full invoice discounting is presented as a rolling line of credit to your business, offering you substantial flexibility once it has been set up. Future invoices will be able to be discounted with no long waits for the administrative process, enabling you to get on with business as if all your future invoices were set to zero-day terms. 

Similarly, repeat part invoice discounting is more easily obtained, giving you a similar level of flexibility without leveraging your entire accounts receivable. 

An invoice discounting package can therefore be tailored to fit your company’s precise needs. 

Disadvantage #2 - The Reliance Trap 

Like other ongoing lines of credit, invoice discounting can become a little too easy. Once you are settled into the habit of paying your invoice discounting fees and are used to the idea of accessing the money from invoices without delay, it can be difficult to release yourself from the model. Potentially, making your business reliant on the finance. 

This can lead to years where you are paying ongoing administration and discounting fees that you no longer need to service. Especially as your company grows and realises the cash flow that would allow it to comfortably work within standard invoice terms. 

It is essential that you manage your invoice discounting efficiently and determine an exit strategy that releases you from the prospect of a cycle of debt.

Advantage #3 - The Invisibility of Invoice Discounting

The main comparable form of invoice finance is that of invoice factoring, is a transparent arrangement that is visible to your clients, potentially damaging your reputation. Invoice discounting, by comparison, doesn’t have to share this quality and is completely private, allowing you to leverage finance against your customer invoices without their knowledge. 

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Disadvantage #3 - A Bias for Larger Enterprises 

Invoice discounting is a tool that is significantly easier (and more cost-effective) for larger companies. There are comparatively few lenders willing to offer invoice discounting for smaller businesses, making it sometimes out of reach. In these situations, smaller businesses might want to consider alternative financing, such as invoice factoring or a standard business loan.

Advantage #4 - Opening Up Opportunities 

Freeing up your finances early provides you with capital you can use for other purposes. Invoice discounting can allow you to take immediate action when you seize new opportunities as they come up. This means your business can grow and develop without being locked constantly chasing customers for payment.

Invoice Finance Quotes »

Alternatives to Invoice Discounting

There are several alternatives to invoice discounting to help you with ongoing cash flow and delays with invoice payments. These include:

Finding the Best Invoice Discounting - Using Clifton Private Finance to Your Advantage 

At Clifton Private Finance, we have a team of invoice discounting experts ready to help your business get swift access to the funds it needs, whatever the size of your company. Give us a call today to speak to an advisor and find out more. 

Discover tailored invoice discounting solutions at Clifton Private Finance designed to elevate your business.

Our dedicated team specialises in securing competitive invoice finance options crafted to meet your unique needs.

Unlock the benefits of our invoice discounting service, including:

  • Competitive rates that lead the market
  • Rapid funding – receive finance within 5 to 7 days
  • Access to a network of specialist lenders
  • Expert advice and professional service

Explore the possibilities for your business. Connect with us now at 203 880 8890 or book a consultation below.

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Is invoice discounting a good idea?

Invoice discounting benefits businesses with regular invoicing and dependable clients. It unlocks funds tied to unpaid invoices, improving cash flow for day-to-day operations or expansion. However, consider costs, eligibility, and potential impact on customer relationships before choosing this financing option.

How much does invoice discounting cost?

Costs vary based on business size, customer creditworthiness, and terms from the provider. Fees typically include a discount charge and a service fee. To decide, compare quotes from different providers, understanding all associated costs.

Is invoice discounting cheaper than factoring?

Invoice discounting is often cheaper than factoring due to retained control over the sales ledger and credit. Factoring includes credit management, making it relatively more expensive. Costs depend on business needs and negotiated terms with the financing provider.

Do banks do invoice discounting?

Yes, many banks offer invoice discounting with specific eligibility criteria. Non-bank financial institutions and specialist finance companies also provide options, offering a broader range for businesses seeking this financing.

Is invoice discounting regulated by the FCA?

Invoice discounting itself isn't directly regulated by the FCA. However, ensure the provider is reputable and regulated. Check the FCA register for compliance. Regulatory requirements may change, so verify the current status with the latest information available.