Invoice discounting: What it is and how it works

Invoice discounting gives you fast access to cash tied up in unpaid invoices, helping you smooth out gaps when customers take 30–90 days to pay. Instead of waiting, you can borrow against those invoices and keep operations moving.

This financing method works well for B2B companies with reliable customers and recurring credit terms. It helps you cover expenses, manage working capital, and take on new orders while maintaining control of your customer relationships.

What is invoice discounting?

Invoice discounting is a short-term financing method that lets you borrow against your unpaid customer invoices. Instead of waiting for clients to pay, a lender advances you a percentage of the invoice value, and you repay the funds once your customer pays their bill.

This approach helps you unlock cash from unpaid invoices and cover expenses without disrupting customer relationships. You retain control of collections, and customers typically don’t know you’re using financing.

The benefits of invoice discounting include:

• Short-term financing solution: You receive fast access to funds without committing to a long-term loan
• No need for additional collateral: Your unpaid invoices serve as the collateral
• Improved cash flow: Early access to funds helps you cover operational expenses or support growth
• Retain control of collections: You manage customer communication and payment follow-ups directly
• Confidential financing arrangement: Customers usually remain unaware of the financing

If you’re dealing with delayed payments or limited access to traditional credit, invoice discounting can help you keep operations moving.

How does invoice discounting work?

Invoice discounting lets you submit unpaid invoices to a lender in exchange for an upfront advance, then repay the funds once your customer pays. While details vary by provider, the process generally works like this:

1. Apply for invoice discounting: Share financial information such as your revenue and business credit profile. Some lenders may also review your customers’ credit
2. Receive terms from the lender: Review the advance rate, payout timing, repayment terms, and any fees
3. Submit unpaid invoices: Choose which invoices to submit for funding; most agreements let you decide on a case-by-case basis
4. Receive an advance: Funds typically arrive within 1–2 business days and always before the customer’s invoice is due
5. Repay the lender: After your customer pays, you repay the advance plus any service fees

Your borrowing capacity is tied to the value of your outstanding accounts receivable, so you can only access as much funding as you have in open invoices. That means invoice discounting isn’t a fit if you need capital before you begin generating sales.

Key players in invoice discounting

Invoice discounting involves three parties: your business, the discounting provider, and your customer. Because you retain control of collections, customers usually don’t know you’re using financing.

• Business/borrower: You submit unpaid invoices and receive an advance, often 70–90% of the invoice value
• Invoice discounting provider: The lender reviews your invoices and customers’ credit, advances funds, and charges service and interest fees
• Customer: Your client pays their invoice as usual, unaware that you’ve borrowed against it since you manage all communication and collections

This setup keeps the arrangement confidential while giving you faster access to cash tied up in receivables.

Fees and costs

Invoice discounting providers charge a service fee, usually 0.5% to 3% of the invoice value, plus a discount rate that works like interest on the advance. The discount rate ranges from 1% to 5% above the base rate and increases the longer your customer takes to pay.

Watch for additional charges such as setup fees, monthly account fees, credit check costs, or early termination penalties. Some lenders also charge for invoice amendments or late customer payments. Get a full breakdown before signing so you can compare the total cost across different providers.

Invoice discounting calculation

This example shows how invoice discounting affects your cash flow and what it costs:

• Your situation: You issue a $10,000 invoice with 60-day payment terms and need cash now to cover payroll and materials
• The advance: The provider offers an 85% advance rate, so you receive $8,500 within 24 hours
• Service fee: The provider charges a 2% service fee on the invoice value: $10,000 * 0.02 = $200
• Discount rate: The provider also charges a 2.5% monthly discount rate on the advanced amount. For 60 days: $8,500 * 0.025 * 2 = $425
• Customer payment: Your customer pays the full $10,000 after 60 days, which you then forward to the provider
• Final settlement: The provider returns the remaining balance: $10,000 – $8,500 – $200 – $425 = $875
• Total cost: You paid $625 in fees ($200 + $425) to access $8,500 immediately instead of waiting 60 days. That equals roughly 6.25% of the invoice value, or about 37.5% annualized.

Invoice discounting vs. invoice factoring

Invoice discounting and invoice factoring both give you faster access to cash tied up in unpaid invoices, but they work differently. Discounting lets you borrow against invoice value, while factoring involves selling the invoices to a third party that takes over collections.

Here’s how they compare:

When to choose invoice discounting

Invoice discounting is a good fit when you need faster access to cash but want to keep control of customer relationships and collections.

Consider invoice discounting if your business:

• Has reliable customers who pay on time
• Wants to communicate with customers directly to maintain strong relationships
• Needs short-term financing without committing to a long-term loan

It may not be the best option if chasing overdue payments is a challenge or your team doesn’t have the bandwidth to manage collections.

When to choose invoice factoring

Invoice factoring works well when you want to improve cash flow and outsource the time-consuming process of managing customer payments.

Invoice factoring may be a better fit if your business:

• Wants to offload the burden of chasing late payments
• Needs a simpler way to manage collections through a third party
• Deals with high volumes of overdue accounts that are difficult to track internally

It may not be ideal if maintaining direct customer relationships or keeping financing arrangements confidential is a top priority.

Benefits of invoice discounting

Invoice discounting offers several advantages if you’re dealing with delayed payments or need more predictable cash flow:

• Improved cash flow and working capital: You get faster access to funds tied up in unpaid invoices
• Confidentiality maintains customer relationships: Customers continue paying you directly and typically don’t know you’re using financing
• Retain control over credit management: You manage collections, credit decisions, and customer communication
• Flexibility and scalability as sales grow: Your available funding increases as invoice volume increases
• Speed of access to funds: Many providers release funds within 24 to 48 hours of invoice submission

These benefits can give you more financial breathing room while keeping your operations running smoothly.

Drawbacks and risks of invoice discounting

Invoice discounting also comes with limitations that are important to consider before committing to a financing arrangement:

• Higher costs than traditional financing: Combined service fees and discount rates often exceed the cost of bank loans or lines of credit
• Reliance on customer payment behavior: You must repay the advance when customers pay, which adds risk if they’re frequently late
• Eligibility requirements: Lenders often expect minimum revenue, clean invoices, and creditworthy customers
• Dependence on the financing arrangement: If the provider withdraws the facility, your cash flow may be disrupted
• Administrative workload: You must maintain accurate records, track payments closely, and reconcile accounts regularly

These factors mean invoice discounting works best when you have reliable customers and strong internal processes to manage collections.

Who can use invoice discounting?

Invoice discounting is typically available to B2B companies that sell on credit terms of 30 to 90 days and have customers with strong payment histories. Lenders often expect a minimum annual revenue level, consistent invoicing practices, and clean, undisputed invoices.

Industries like manufacturing, wholesale, recruitment, staffing, professional services, and construction use invoice discounting frequently because they face long payment cycles but need steady cash to cover payroll, materials, or subcontractors. Both established and growing businesses can qualify if they have the ability to track invoices, monitor customer payments, and manage collections professionally.

How to get started with invoice discounting

Getting started with invoice discounting involves evaluating whether it fits your needs and comparing providers to understand their terms and requirements.

Evaluate whether it’s right for your business

Before approaching lenders, make sure invoice discounting aligns with your cash flow needs and internal processes.

• Review your invoice profile: Look at your average invoice size, payment terms, customer creditworthiness, and payment patterns
• Calculate the true cost: Add up all fees, discount rates, and charges, then compare these to your existing financing options
• Assess your credit management capacity: Ensure your team can manage collections, maintain accurate records, and monitor customer payments
• Analyze cash flow needs: Identify specific gaps or opportunities where faster access to invoice payments would make a difference

Lenders typically request recent financial statements, aged debtor reports, customer payment histories, standard invoice samples, and details about your sales process and credit terms.

Compare providers

Terms vary widely across providers, so comparing multiple offers helps you find the best fit.

Questions to ask include:

• What advance rate do you offer, and does it vary by customer or invoice age
• How do you calculate service fees and discount rates, and what additional charges apply
• What are your minimum volume requirements, contract length, and notice period
• How quickly do you release funds after invoice submission, and what approval steps are required
• Are there industries or customer types you specialize in or exclude

Most providers complete their assessment and setup in 2 to 4 weeks. You’ll submit an application, undergo credit checks, sign agreements, and connect your invoicing systems before receiving your first advance.

Optimize your finances with Ramp

Invoice discounting can help smooth out cash flow, but it’s only one way to access working capital. Ramp gives you more tools to manage expenses, control spending, and build business credit, all in one platform.

Why Ramp makes financial management easier:

• Access working capital with ease: Ramp’s commerce sales-based underwriting evaluates your revenue instead of your years in business
• Optimize expenses effortlessly: Automate invoice processing, control spending by category, and monitor finances in real time
• Build credit while saving money: Use Ramp to stay on top of payments, manage purchases, and strengthen your credit profile

Try an interactive demo to see how Ramp can simplify your finances.