Ethyx Club
December 2, 2025
Invoice discounting helps the businesses to obtain a loan by keeping its trade receivable as collateral. A certain percentage of trade receivables is issued as a loan. This is a very effective financing solution as businesses receive advance cash due from customers through invoice discounting.
Invoice discounting has its own set procedure, is of different types and are also advantageous in accordance to the situation. Read along to get a better know how about it.
Invoice discounting helps to fund and increase cash flow in business. This helps to accelerate growth.
Companies with relatively higher margin of profit have invoice discounting perform remarkably well for them. This is because they have an option of absorbing higher interest charges which are usually associated with this sort of financing solution.
Invoice discounting is very popular and common for business which are high yielding. These high yield businesses experiencing growth require large cash flow to add to their rising growth. Thus, invoice discounting works as a favourable solution for them.
Invoice discounting follows a proper process. They are-
1. A business prepares invoices for goods to be sold customers.
2. These invoices are sent to lending institutions for raising funds
3. The lending institute then verifies the invoices and issues fund as per agreed terms. The funds so issued make up a certain percentage of invoice value.
4. This invoice amount is collected by the business or lending institution as per the agreed terms.
5. When a customer makes a payment against the invoice, the service fee is deducted from it. The amount left after deduction goes to the business entity.
Invoice discounting are of various types. These include-
* Selective invoice discounting:- only selected party invoices are given as collateral for raising fund under this type of invoice discounting.
* Whole turnover invoice discounting:- here, one can avail loan on each invoice generated in the business. Thus, funds can be raised on total turnover.
* Confidential invoice discounting:- in this type of invoice discounting, confidentiality is ensured so that the vendors and customers of the businesses won't come to know about this type of business arrangement.
Invoice discounting has its own set of benefits to reap. They are as follows-
* Higher funds:- with the eventual growth of business, an entity becomes more eligible to avail higher funds based on trade receivables.
* Availability of cash:- with this type of financing, one can easily obtain funds within 72 hours of applying. Thus, it is beneficial for the businesses generating high value invoices.
* Confidentiality:- in case an entity fears losing customer confidence, they can enter into confidential invoice discounting.
* Protection from bad debts:- few lending institutions also provide protection against bad debts by charging an additional fee for the same.
There are many financing options available in the market. To choose whether invoice discounting is suitable for the business is also a task. Following factors should be kept in mind before making a decision-
* Receipt of timely payments from customers
* Lower chances of bad debts
* Strong credit control measures are being followed in the organisation
* Meeting minimum turnover levels to avail this financing option
Both invoice discounting and invoice factoring offer firms and businesses an advance for unpaid invoices. However, they are quite different from each other.
* Invoice discounting is a loan. An invoice factoring company purchases a business's unpaid invoices at a discounted rate.
* In invoice discounting in India, a customer does not know that the invoice has been discounted. Whereas, in invoice factoring, the customer is fully aware that the invoice is being factored.
* In invoice discounting, the business is responsible for collecting invoices. However, in invoice factoring, the finance company holds the responsibility of collecting invoices.
Q. How do I choose which invoice to discount?
Ans. Invoices with explicit terms of payments from client are creditworthy. For most benefit, choose larger sums or those with larger payment cycle.
Q. Who can avail invoice discounting?
Ans. Invoice discounting is available for all businesses and firms selling goods and services to clients. The credit period of invoice discounting ranges between 1 month to 3 months. Invoice discounting is mostly used by manufacturers, b2b services, distributors etc.
Q. How quickly can I get refunds?
Ans. Refunds are credited usually within one to two business days following approval. This is because the procedure is streamlined for speed and cash flow gaps can be quickly closed.
Q. Is invoice discounting risky?
Ans. The innate risk of invoice discounting is the credit risk of the debtor. If the debtor defaults on payment, the creditor will not receive returns.
Q. What is the fee of invoice discounting?
Ans. In invoice discounting, the fees are typically lower than that of factoring. This is because the collection and managing of debts is done by yourself. The fees are usually a small part of the turnover. The fees are less because the level of service provided is suggestively lower than with factoring.
Therefore, invoice discounting is a viable financing option for any business, especially for those dealing in longer payment terms. With the right choices and careful considerations, businesses can effectively manage their needs and achieve their financial goals.