Invoice discounting advantages and disadvantages

Invoice discounting advantages and disadvantages image

One of the biggest worries UK businesses have is running out of money. A large contributor to this is waiting for the painstakingly long invoice term of 30, 60 or sometimes 90 days. You’ve delivered the products or services and are awaiting payment to pay bills and keep your business afloat; this generates unnecessary stress.

Invoice discounting exists to help you unlock that cash tied up in unpaid invoices. You can release most of the unpaid invoice amount instantly, giving you the freedom and flexibility to pay bills on time and invest in your business.

Read on to learn more about how the invoice discounting process works, its pros and cons and how you can set it up today.

What is invoice discounting?

Invoice discounting is a short-term loan that lets business owners release cash tied up in unpaid invoices. So you get the cash almost immediately instead of waiting for the full invoice payment terms.

The process involves submitting your chosen invoices to the discounting company, which then lends you up to 95% of the unpaid invoice amount. When customers pay your invoice, you repay the loan plus the lender’s discounting fees.

Learn more about how invoice discounting works.

The advantages of invoice discounting

You must weigh the pros and cons before making any financial decisions for your business. Here are a few invoice discounting benefits to consider.

  • Immediate access to working capital. Immediate access to funds makes managing cash flow much easier. You know you’ll be able to pay bills on time and manage business expenses without worrying about available funds.
  • Flexibility. You can choose to secure one or multiple invoices against your discounting loan; this means you can decide to access more cash in advance on one month and less on another. Just be careful not to become reliant on this discounting cycle, as it can be challenging to get out of.
  • You remain in control of customer relationships. As you’re the one collecting customer payments as usual, you don’t need to tell them you’re working with a discounting company. But if you choose to sell your invoices to a factoring company instead, you’ll have to disclose this.
  • Your assets are safe. Invoice discounting is an unsecured business loan, which means the lender will not need you to put up collateral, i.e. commercial property or vehicles.

The disadvantages of invoice discounting

Before deciding whether invoice discounting is right for your business, here are some risks you should consider.

  • You’re taking on debt. Unlike invoice factoring, where you sell your commercial invoices in full to the factoring company, invoice discounting is a loan secured against your invoices. You’re liable for the full payment if your customer doesn't pay, so only borrow against reliable customers.
  • High cost. Any loan can eat into your profits, and that’s no different with invoice discounting. Consider all fees before settling on a discounting company; ask yourself if the costs are worth the cash injection.
  • You’re limited by invoice amount. If you’re looking to grow your business quickly, you might need to access more money than what’s outstanding in your invoices. The amounts on your invoice limit your access to finance; you might want to consider a business loan instead.
  • More admin work. It’s your responsibility to chase customer payments, unlike invoice factoring, where they chase on your behalf. That means you still have all the hassle of ensuring payments are made on time.

To sum up

If you think invoice discounting is a good financing option for your business, we’ve got good news — finding an invoice discounting company is quick and simple. Use our free loan comparison tool; tell us your requirements, i.e. how much you want, what you want it for, etc., and our self-serve tool will automatically match you with suitable loan products and lenders.

Compare each offer at a glance and expand the sections to learn more. From there, you can continue with your online application.

There’s no obligation to proceed with any loan offer; getting a quote won’t affect your credit score. Get your quote today.

About the author

Helen Jackson Author
Written by Helen Jackson | December 11, 2023

Money Writer

Helen has over nine years of experience in content writing and writes financial content for us here at Capalona.

Updated: December 11, 2023
Published: December 05, 2023

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