Like factoring, invoice discounting releases the cash tied up in unpaid invoices. It makes 80-90 per cent of the invoice value available as soon as it has been raised and the remainder is passed over when the customer pays.
Unlike factoring, the business retains control of the credit management function and in most cases the client's customers are unaware of the invoice discounting arrangement.
This confidentiality makes it more popular amongst more established and sophisticated businesses. Consequently, the average size of a business using invoice discounting is higher than those using factoring and is usually between £1-25million annual sales. Some 10,000 UK businesses use invoice discounting.
The fee structure is similar to Factoring although the charge on turnover is smaller because there is no credit management service. The cost of funds is also likely to be lower, reflecting the stronger financial standing of the business being funded.