What is invoice discounting?

Invoice discounting is a type of short term finance which allows a business to gain access to instant funds secured by their accounts receivable ledger. This helps solve cash flow issues, as they don’t have to wait 30+ days for payment. Unlike factoring, the lender is usually not disclosed to a business’ customers.

A shortage of working capital is a serious problem for most businesses. Cash flow problems are a headache for almost 50% of Australian companies. With credit terms on invoices up to 90 days being able to secure funds against them helps provides an instant boost.

Invoice discounting is often known by other names, including invoice finance, accounts receivable finance or debtor finance.

These terms in fact describe the broader category of which discounting is a specific type. Invoice discounting is very similar to factoring, with a couple of key differences which we’ll explore in this article.

How it all works

It generally works like this:

  • During the application process, the lender will review your sales ledger. They’ll look at the number and concentration of debtors, their creditworthiness and the age and value of invoices.
  • Based on this, they’ll advance you a proportion of the ledger value, usually around 75-85%.
  • Once the outstanding invoices have been paid, they’ll then remit the outstanding balance, minus their fees.
  • The limit will grow with you - as more invoices are raised, more funds are available - no further application required.

Types of invoice discounting:

Confidential - this is the most common form of invoice discounting, where the facility is not disclosed to a business’ customers. Disclosed - alternatively, there are finance facilities where the arrangement is known to customers. Selective - funds are usually raised against the entire accounts receivable ledger. However, selective invoice discounting allows individual invoices or customers to be selected instead.

Factoring and invoice discounting

An alternative to invoice discounting is factoring. Both offer funds secured against the accounts receivable ledger. They share many of the same benefits. Quick cash flow, no fixed assets as security, relatively fast and simple application process. But there are a few key differences:

Invoice DiscountingInvoice Factoring
You remain in control of credit control and collectionsSuited to / available for smaller businesses, who may need help with their bookkeeping
Suited to / available for larger businesses, with less need for admin helpThe accounts receivable ledger is sold to the lender
The accounts receivable ledger is not sold, but funds are drawn against itMore expensive than discounting as it includes additional services
Doesn’t require any fixed assets as collateralClients are usually aware of the need for finance
Cheaper than factoringFactoring companies can interfere with precious client relationships
Clients are usually unaware of the need for financeCustomers pay the factor
Business stays in control of client relationshipsLess risky for lender as they manage collections
Customers pay the business as usual
More risky for lender as no contact with debtors

More on invoice factoring here.

The pros and cons of invoice discounting

ProsCons
Improved cash flow, allowing you to fulfil orders, pay staff, cover operational costs and growWhilst it is cheaper than factoring, it is still expensive compared to other forms of finance
It grows as you do. As more invoices are raised, the amount available increasesUnlike factoring, no admin support (although this is an advantage too)
Fast funds - often the business receives funds in 24 hoursOften unavailable to smaller businesses
Doesn’t require any fixed assets as collateralThe entire ledger is usually funded, rather than individual invoices or clients
You stay in control of credit and collections
Lender does not interfere with your client relationships
Can take the form of a line of credit, allowing businesses to draw and redraw endlessly

The Waddle Difference

Waddle is not discounting. We’ve built an innovative invoice finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.

Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.

It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital with minimal fuss. Get an offer now!