Invoice discounting: borrow against your ledger and keep control of collections

Most invoice discounting is confidential, meaning your customers are not told about the facility, but some lenders offer a disclosed version where a notice of assignment appears on invoices while you still run collections. Confidentiality is a privilege lenders grant to businesses they trust, and they can withdraw it if reporting deteriorates or the business runs into difficulty.

A confidential facility suits firms that worry customers or competitors might read invoice finance as a sign of weakness, or whose contracts make disclosure awkward. If confidentiality is your main requirement, our page on confidential invoice finance explains the options in detail, including for businesses that do not yet meet every discounting criterion. A disclosed discounting facility can be easier to obtain and is sometimes a stepping stone between factoring and full confidentiality.

Whole-turnover invoice discounting funds your entire trade ledger under one facility, while selective discounting funds only the invoices or customers you choose. The choice shapes the cost, the commitment and how much funding you can reach.

Whole-turnover facilities give the highest availability and usually the lowest cost per pound borrowed, because the funder sees and secures the whole book. In return they carry a minimum term and a notice period, and minimum fees apply even in quiet months. Selective discounting avoids that commitment and suits businesses that only need occasional cash against a few large invoices. Per invoice it is generally more expensive, and some providers take only debts owed by strong customers. Our page on selective invoice finance covers that route.

Invoice discounting suits businesses with a meaningful turnover, a trading track record and reliable credit control and ledger systems of their own. Lenders are handing day-to-day management of their security back to you, so they want evidence that your team collects well and reports accurately.

It tends to fit:

• Manufacturers, distributors and wholesalers selling to a broad base of trade customers.
• Professional and business services firms with recurring invoiced fees and an established accounts department.
• Businesses that have outgrown invoice factoring and want lower costs and control of customer contact.
• Companies funding growth, acquisitions or a refinance, where the debtor book is one of their largest assets. Larger cases are often combined with stock and plant in asset-based lending.

It is often not available yet to:

• Start-ups and very young businesses without filed accounts or a collections record.
• Businesses with low turnover, where a lender's minimum fees would outweigh the benefit.
• Firms without dedicated credit control, or whose accounts are not kept up to date monthly.
• Companies with HMRC arrears, recent losses that weaken the balance sheet, or a very concentrated ledger. One dominant customer may need a high-concentration facility instead.

Young and smaller businesses commonly start with factoring and move across once they meet these thresholds.

Every invoice discounting facility comes with ongoing reporting and periodic audits, because the funder relies on your records rather than running the ledger itself. Expect to upload sales and cash information regularly and to provide a full aged debtor report and reconciliation, usually monthly.

Before the facility starts, the lender typically carries out a survey of your systems and a sample of debts. After that, audits recur at intervals set by the lender, often once or twice a year, and more often if issues appear. Auditors test that invoices reflect real deliveries, that credit notes are recorded promptly, that cash is banked correctly and that no customer has been contacted to pay elsewhere. Findings can lead to tighter eligibility rules or, in serious cases, to the loss of confidentiality.

A new invoice discounting facility typically takes two to four weeks to put in place, and larger or more complex cases can take longer. The survey of your systems, legal documentation, any release of security by an existing lender and the funder's verification of a sample of debts all affect the timetable. Well-organised management information shortens it considerably. Once live, drawings against reported debts are often available within a working day, depending on the funder's cut-off times.

Invoice discounting is secured on your book debts through an assignment, almost always supported by a debenture giving the funder a fixed charge over debts and a floating charge over other assets. Our guide to debentures and fixed and floating charges explains what each covers.

Because you control collections, lenders often ask directors for warranties that the information supplied is accurate, and an indemnity covering losses caused by invalid invoices. Many also request a personal guarantee, sometimes limited to a fixed amount. Our guide to personal guarantees sets out what to check before you sign. If you already have bank borrowing, the bank and the discounter will normally need an agreement on which of them has priority over which assets.

Invoice discounting is priced mainly through a service fee and a discount charge, and the service fee is usually lower than on factoring because the funder is not running your credit control. You are paying for funding and administration, not collections.

• Service fee. A percentage of your turnover or of the invoices you report, often subject to a minimum monthly or annual amount.
• Discount charge. Interest on the balance you actually draw, usually a margin over the Bank of England base rate, calculated daily.
• Audit and survey fees. Charges for the initial survey and periodic audits, depending on the lender.
• Other charges. These may include same-day payment fees, credit insurance premiums if you add bad-debt protection, fees for disapproved invoices and costs for leaving during the minimum term.

Whole-turnover agreements commonly carry a minimum term, often 12 months, and a notice period, often three months. Compare total cost on your realistic turnover and drawing pattern, not only the headline fee.

The main alternatives are invoice factoring, selective funding, a revolving credit facility or a broader asset-based facility, depending on your size and what you need the money for.

• Invoice factoring if you do not yet meet discounting criteria or would welcome outsourced collections.
• Selective invoice finance for occasional funding on chosen invoices.
• A revolving credit facility where you want a flexible limit not tied to your ledger.
• Stock finance or trade finance where the cash gap arises before you can invoice.
• Export invoice finance where a significant share of debtors are overseas.