What is invoice discounting?

In invoice discounting, a lender advances a percentage of the invoice value — typically 70 to 90 percent — as soon as the invoice is issued. The business then collects as normal and repays the advance plus a fee when the customer pays. Customers usually do not know any financing arrangement exists, which is why it is sometimes called confidential invoice discounting.

The main difference from factoring is who controls collections. With factoring, the factor buys the invoices and typically manages collection — customers pay the factor directly and often know their receivable has been sold. With discounting, the business keeps its customer relationships and collection process intact. Discounting usually requires a more established credit profile and consistent invoice volume, while factoring is sometimes available to younger businesses in exchange for a higher fee and reduced control.