May 13, 2022

Invoice discounting: Using your unpaid invoices to generate working capital

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Small businesses know all too well that issuing or creating invoices is not the same as getting them paid. Unpaid invoices put a strain on operations because it is tough to predict when a client will come around to it. Invoice discounting offers relief by paying out a portion of the invoice in days, rather than weeks or months. 

In this article, we'll discuss what invoice discounting is, how it works, and how to determine whether it is a good fit for your business. 

What is invoice discounting?

Invoice discounting is a way to finance your business by using unpaid invoices as collateral. Instead of waiting for clients to pay invoices, a lender will loan a percentage of your expected revenue upfront. 

For example, if you issue an invoice of $10,000 to be paid within 90 days, a lender could give you $8,500 immediately. The expectation is that when the $10,000 is paid to your business, you will then pay the lender back.

Invoice discounting differs from invoice factoring because you are still responsible for chasing the invoice and making sure it gets paid, whereas with invoice factoring, that process is typically handled for you. 

This also means that your clients do not have to know that you are using invoice discounting. It is a confidential agreement made between yourself and the loan provider—they will never interact with your clients or ask your clients to pay the invoice. 

How does the invoice discounting process work?

With invoice discounting, your loan amount only goes up to the value of your unpaid invoices (or accounts receivable). This means you cannot borrow beyond the number of sales you make at any given time. As such, it is not a good option for businesses that need investment prior to attracting clients. 

The exact steps will vary based on which lender you choose to work with, but the general timeline goes something like this:

  1. Apply for invoice discounting. This will require financial information such as your annual revenue and business credit score. Many lenders require a minimum credit score of 500, but some will skip your credit score altogether and look at the creditworthiness of your customers. Almost all lenders will require an average of 5-figure revenue, so if your business hasn’t surpassed the $10,000 mark, this type of funding might not be available to you. 
  2. Receive terms from the lender. Depending on your situation and which lending partner you choose, you will see a range of terms. Check how quickly payouts will be received, what percentage of the invoice you will receive, how long you have to pay back the loan, and if there are any service fees. 
  3. Submit unpaid invoices to the lender. When you have an invoice that you would like to be paid early, submit it to the lender. Depending on your agreement, you are not required to submit every invoice to the lender. 
  4. The lender will send a percentage of the invoice. The time frame depends on the lender and the loan amount, but typically runs 5-10 business days. It should always be in less time than the customer is expected to pay the invoice. 
  5. When your customer pays you, you pay the lender. You are responsible for chasing down the outstanding invoice to make sure it gets paid. Because this is a loan, you may incur late fees if you are not able to repay in a timely manner.

What types of companies should use invoice discounting?

Invoice discounting works best for businesses that regularly issue invoices for significant dollar amounts that are not likely to be paid upon receipt. 

Businesses that are struggling financially can be good candidates for invoice discounting, as are ones with good profit margins, but because the loan amount depends on unpaid invoice value, it is not a good option for businesses that have not yet secured clients. 

Industries that commonly use this type of loan include:


With invoices in the thousands and sometimes millions, the construction industry is a great candidate for invoice discounting. Getting paid earlier provides the cash flow to pay for materials and contractors. 

Professional services

Professional services like administrative assistance, copywriting, photography, and design usually have low marginal costs. This means the marginal profits are substantial and invoice discounting gets paychecks out faster.


Recruitment is another industry where profit margins are high and invoice discounting helps get employees paid faster. 


If you are working with large orders and full payment is only due upon delivery, invoice discounting takes the guesswork out of the timeline. 

There is no industry or company size required to apply for invoice discounting. But financial factors like creditworthiness and revenue will determine if you qualify for invoice discounting and the terms of the agreement. 

Pros and cons of invoice discounting

Like all forms of debt, invoice discounting comes with pros and cons. Deciding whether to pursue this type of financing comes down to the nature of your business, its financial situation, and your personal preference as a business owner. 

✅ Pro: No collateral 

A unique advantage of this type of loan is that you don’t need to put down collateral. Other loans require assets like property, equity or other investments in order to qualify. With invoice discounting, your unpaid invoices act as collateral. 

✅ Pro: Better cash flow

Like most loans, invoice discounting increases your cash flow. This gives you cash on hand to pay for operational costs or make investments in your business. 

✅ Pro: Short-term loan

Unlike other loans, invoice discounting is very short term. There are no 5-year (or even 1-year) agreements. Instead of charging an APY, your lender will take a percentage of the invoice amount. 

❌ Con: Lower profit margins

Invoice discounting eats at profit margins because of the relatively high percentage that lenders take from the invoice amount. It’s up to you as a business owner to answer the question: do I want 80-90% of my revenue immediately or 100% of my revenue when my customer pays the invoice?

❌ Con: Higher cost

This type of loan costs more than most other loans in terms of percentages. Whereas you might see small business loans with APYs of 3-7%, invoice discounting often takes 10-15% or more of the invoice total. There may also be service fees or late fees involved. 

❌ Con: Potential for over-reliance

While the short-term nature of invoice financing can be a plus, it may also cause your business to feel like a hamster wheel. This is especially true if you get every invoice paid early by the lender and then chase clients in order to repay the loan in time. 

Additional types of invoice financing

Invoice discounting is not the only type of loan that is based on unpaid invoices. Here we’ll cover a few more and compare how they work. 

Invoice factoring

Unlike invoice discounting, invoice factoring is not a debt. Rather, you sell your unpaid invoices to another company and they take on the responsibility of collecting that debt. This must be disclosed to customers because they will pay the company that bought the invoice. 

Reverse invoice factoring

Reverse invoice factoring is also a way to increase cash flow, but it works in the opposite direction as invoice factoring. Instead of selling your client invoices, you ask a lender to pay your supplier invoices. They pay your supplier quickly in exchange for a discount and then you pay the full amount to the lender at a later date. 

Bill discounting

Bill discounting works similarly to invoice discounting, but the loan amount is set against “bills of exchange” rather than invoices. The most impactful difference is that bill discounting works for bills due in 30 to 120 days, whereas invoice discounting usually has a limit of 90 days. 

Optimize your finances with Ramp

If invoice discounting is not for you or if you want options in addition to invoice discounting, Ramp is here to help. 

Commerce sales-based underwriting

Ramp’s commerce sales-based underwriting method gives you access to working capital without jumping through the hoops of traditional underwriting. Instead of looking at cash on hand or years in operation as a sign of business health, we let your revenue speak for you. 

Instead of asking you to chase down documentation, our platform lets you easily connect to Stripe, Shopify, Amazon and other platforms where you’re already conducting your business. With as little as one year of data, we’re able to approve you for a higher credit limit. 

Expense management

Whether you need to manage capital from a loan or want to optimize your current spending before applying for one, Ramp’s expense management system helps you gain visibility into your business finances. 

With Ramp, finance automation does much more than pay your bills on time. When you automate invoice processing and spend with Ramp, you’ll immediately be able to place spending controls by category, access dashboards and get AI-powered alerts for saving opportunities. 

Building credit

Credit is often the biggest barrier to securing traditional loans. Not only does Ramp help you access business credit sooner through innovative underwriting techniques, but the built-in expense management system keeps you on top of your payments and helps you build your credit even further. As an added bonus, you’ll get 1.5% cashback on bill paid using your Ramp card. 

When you’re ready to apply for other types of funding, you’ll be confident in your finances—and so will your lender. Learn more about Ramp today.

Former Senior Content Marketing Manager, Ramp

As a Content Marketing Manager, Luis tackles content planning and ideation while constantly brewing over SEO opportunities. Before Ramp, he worked on content for Audible and WeWork.


What is invoice discounting?

Invoice discounting is a way to finance a business by using unpaid invoices as collateral.

What is an example of invoice discounting?

Let’s say a construction company secures a project for $50,000 but the invoice will only be paid upon completing the project. Because the company needs cash on hand to buy materials and pay their workers, they may opt to receive 80% of that amount immediately by using invoice discounting. They use the cash to finish the project and then repay the lender once the invoice is paid. 

Is invoice discounting risky?

Invoice discounting is a type of debt and it must be repaid on time to avoid late fees and negative impact on creditworthiness. Consider your profit margins and revenue, and plan for your cash flow to determine whether it is right for your business. 

What is confidential invoice discounting?

Confidential invoice discounting refers to a private agreement made between a funding source and a business.

This is actually how the majority of invoice discounting processes are handled. Invoiced funds are paid as normal, but clients aren’t aware that a business has utilized an external financing company.

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