What are the pros and cons of invoice discounting?

A recent study suggested that British SMEs are owed a staggering £67.4 billion in unpaid invoices.

Even Britain’s largest enterprises, turning over £500m+, are facing waits of around 48 days to be paid – and it’s a similar story across other countries, too.


The good news is that there are numerous ways available to help businesses unlock this capital.

Invoice discounting is one such solution.

Essentially, it involves a third party, either an independent financier or bank, agreeing to ‘buy’ your unpaid invoices. They’ll advance you a percentage of the invoice amount – usually between 85 and 95 per cent. Then, when your clients pay, you repay the lender the full amount, plus a fee.

What sets invoice discounting apart from other solutions, such as factoring, is that you retain control over your sales-ledger and collection of payment from your customers.

Let’s take a look at some of the pros and cons of invoice discounting…


Benefit from an improved working capital position. Let’s start with the most obvious benefit – invoice discounting can unlock huge amounts of cash that can be ploughed back into your business. Working capital has traditionally been problematic for a large number of companies, with 60% of businesses admitting they have struggled with late payments. Access to cash, often within 24 hours of invoices being created, gives your business engine the fuel it needs to keep running – meeting essential expenses, both anticipated and unexpected.

It’s cost-effective. Invoice discounting is a highly competitive source of finance, with a number of lenders to choose from. This, combined with favourable terms, can make it more attractive than other sources of finance.

You can keep the arrangement confidential. With invoice factoring, it falls to the financial institution to chase the debt for themselves. While this frees up time (as we’ll cover in more detail later on) many businesses would prefer to keep their financing arrangements private. Invoice discounting, by contrast, does not involve the funder in the collection process, thus keeping your customers unaware of your invoice funding arrangement.

You’re in charge of your customer relationship. Further to the above point, the fact that you’re in charge of recovering your own receivables also means you remain in full control of how your customer is approached for payment and how your customer perceives your business.

You can protect yourself from bad debt. We’ve already touched on late payments – so what about non-payment? Research suggests as many as two-thirds of companies have had to write off an invoice. If you choose non-recourse invoice financing, the risk of non-payment sits squarely with the lender. Of course, you’ll generally have to pay a higher fee to compensate for that increased level of risk.

It can save you money. Improved working capital has many benefits – and high on the list is the ability to pay your own invoices early. This gives you the potential to negotiate early payment discounts with your suppliers.

No costs for unused financing. Finance costs are linked to the invoices you discount – so, no discounting, no fees.

No business assets tied up. With invoice discounting, finance is secured entirely on customer receivables, not on other business assets.


It’s short-term in nature. While selling a single invoice can give you access to cash – it won’t address any long-term cash flow issues. Selling invoices on an individual basis is unreliable with little security over finance rates. The best way around this is to think medium to long term and set up an invoice discounting programme. With an invoice discounting programme, you will receive a line of finance over a specified period, say 12-18 months, on which you can draw as needs arise.

You still need to chase. Again, you retain control over your sales-ledger. This is great for businesses looking to keep the arrangement confidential, but it means that you’re in charge of recovering payment. Research suggests that SME’s could save up to 10 hours a week which would otherwise be spent chasing payments – a figure which only increases for larger enterprises.

It can be risky. If you choose recourse over non-recourse invoice discounting, you’re required to pay the money back – regardless of whether the invoice is eventually paid. Again, you can expect to pay lower fees as you incur this risk – but is it a risk you can afford to incur?

Closing Thoughts

Invoice discounting is a great way to free up working capital, while retaining control over your sales-ledger and remaining free to manage your customer relationships. It can be entirely confidential, it doesn’t tie up business assets and there are no costs for unused finance.

You’ll still need to chase your own receivables, and will need to be careful to choose the right invoice discount programme for your business– but it remains a great solution for businesses of all sizes and in all sectors.