Invoice Discounting Explained: What It Is, How It Works, and Alternatives

Invoice discounting is a form of business finance that uses outstanding invoices as security for a funding facility. Like factoring, it provides access to cash from unpaid invoices. The key difference is that the business retains control of its own debtor ledger and collection process.

How Invoice Discounting Works

In a typical invoice discounting arrangement:

1. The business raises invoices against its customers
2. The finance provider makes a percentage of those invoice values available as a credit facility
3. The business draws on that facility as needed
4. The business continues to manage its own collections, chasing and receiving payment from customers directly
5. As customers pay, the facility is repaid

The critical distinction from factoring: customers pay the business, not the finance provider. Invoice discounting is typically confidential, customers may be unaware that their invoices underpin a finance facility.

Invoice Discounting vs Invoice Factoring

Limitations of Traditional Invoice Discounting

Traditional invoice discounting facilities typically require:

• A minimum annual invoice turnover (often $500k+)
• Whole-ledger assignment
• Ongoing reporting and audit requirements
• Minimum contract periods

These requirements have historically made invoice discounting inaccessible to smaller businesses.

The Modern Alternative: Selective Invoice Finance

FundTap combines the key benefit of invoice discounting, confidential funding where clients pay the business directly, with the flexibility of selective use (no whole-ledger requirement) and the speed of modern fintech (the same day).

For small businesses that want the privacy and simplicity of invoice discounting without the scale or contract requirements of traditional facilities, FundTap is a practical alternative worth exploring.

Frequently Asked Questions