Invoice discounting is a form of receivables financing in which a lender or factor advances money against a company's unpaid invoices while the company keeps managing its own sales ledger and collections. Customers usually do not know a financier is involved.
How it works in factoring
The business submits invoices or a summary of its receivables. The financier advances a share of their value and charges a fee or interest on the funds used. The business collects payments as usual, typically into an account the financier controls, and the balance falls as customers pay.
Compared with traditional factoring:
| Factoring | Invoice discounting | |
|---|---|---|
| Who collects | Usually the factor | The business |
| Customer notified | Usually yes | Usually no |
| Legal form | Sale of invoices | Often a loan secured by invoices |
| Typical users | Wide range | Established firms with strong controls |
The term is more common in the United Kingdom and Europe. In the US, similar products are often described as non-notification factoring or an accounts receivable line within asset-based lending.
What to check
- Whether the arrangement is a sale or a loan, which affects accounting and legal treatment
- Reporting obligations, such as monthly aging reports and borrowing base certificates
- Controls on the collection account
- Whether the financier can switch to notification
Invoice discounting gives more privacy and control, but it requires disciplined bookkeeping. Lenders will expect accurate, timely reporting.