Invoice discounting: confidential invoice finance explained

A customer paying by card at a shop counter

How invoice discounting works

You assign your sales ledger to the funder, as you would with factoring, but you keep the work of running it. Each week or each day you send the funder a schedule of new invoices and a report of cash received, and it updates your availability: the advance percentage applied to approved invoices, less what you have drawn.

Your customers pay into a bank account in your company’s name that the funder controls, often called a trust or collection account. The money is swept across to the funder each day to reduce what you owe, and you draw again up to your availability when you need cash. Your credit controller keeps chasing customers in the company’s own name.

The cost has the same two parts as other invoice finance: a discount charge on the money drawn and a service fee. The service fee is lower than for factoring, because the funder is not running your credit control. Discounting adds a cost factoring does not have: the time your own team spends on the reporting.

Confidentiality

Confidential invoice discounting means your customers are not told about the assignment. Under section 136 of the Law of Property Act 1925, an assignment of a debt takes effect in law only once the debtor has had express written notice, so without that notice the funder holds an equitable assignment. It keeps the right to notify your customers and collect directly if you break the agreement or the company becomes insolvent.

Because the funder cannot see your customers’ payments arrive in its own account, it relies on your reporting and on its audits. That is why confidential discounting is offered to businesses with a track record, reliable bookkeeping and a credit control function that already works. A funder that loses confidence in your reports can move you to a disclosed facility, where customers are told, or to factoring.

Disclosed invoice discounting sits in between. Your customers are told the debt is assigned and pay the funder’s account, but you still do the chasing. It is an option where a funder will not go confidential but you want to keep the relationship with your customers in your own hands.

What the funder checks before and during the facility

An aged debtors list that ties to your accounting software and bank statements
Your terms of trade, customer contracts and any clauses on set-off or retention
Concentration: how much of the ledger sits with your largest customers
Credit notes, disputes and invoices raised before delivery
Customers who are also suppliers, whose balances can be set off
Your credit control routine: who chases, when, and what is written down

Before the facility starts, the funder sends a surveyor to test a sample of invoices against delivery records and contact some customers in a way that does not reveal the facility. After it starts, audits repeat on a schedule, and you pay for them. An audit that finds invoices raised early, cash banked in the wrong account or disputes not reported can cut your availability the same week and put the facility on notice.

What discounting costs over a year

Illustrative example

A company invoicing £3 million a year evenly to business customers who pay after 50 days on average. The advance, the rate and the fees are assumptions for the arithmetic: each funder sets its own.

Average unpaid invoices (£3m × 50 ÷ 365): £410,959
Average money drawn at an assumed 80% advance: £328,767
Discount charge on £328,767 at an assumed 8% a year: £26,301
Service fee at an assumed 0.3% of £3 million invoiced: £9,000
Audit fees, assumed: £2,000
Cost for the year: £37,301

That is 1.24% of turnover. Here the discount charge is the larger part, so the cost depends on how much you draw and how promptly your customers pay. Leaving availability undrawn costs only the service fee, which makes discounting a useful standby for a business whose need for cash comes and goes. Check each offer for minimum annual fees, which can make a facility you barely use expensive. The invoice finance calculator works it out on your own figures.

Invoice discounting or factoring

	Invoice discounting	Factoring
Who chases customers	Your own credit control team	The funder
Do customers know?	Not with confidential discounting	Yes
Where customers pay	An account in your name the funder controls	The funder’s account
Service fee	Lower	Higher, because it includes collection
Reporting you do	Regular schedules of invoices and cash, plus audits	Less, because the funder runs the ledger
Who it is offered to	Established businesses with good records	Smaller and younger businesses as well

A business on factoring can ask to move to discounting once it has its own credit controller and a few years of clean records. The funder can switch the same facility over, or a new funder can refinance it and take an assignment of the ledger.

Who invoice discounting suits

It suits a limited company or LLP with business customers on credit terms, a credit controller or finance team, accounting software that produces an accurate aged debtors list on demand, and enough turnover for the fees to make sense. It also suits a business that values its customer relationships enough to want to keep every conversation about money in its own name.

It suits a business less well if its records are patchy, its customers dispute invoices, or it invoices ahead of delivery. Funders read those as risk, and confidential discounting relies on the funder trusting what you report. A business in that position will be offered factoring, or a disclosed facility.

If your sales are concentrated in one or two large customers, ask how the funder treats concentration before you sign. A limit on what it will lend against a single customer can leave you with less availability than the headline advance suggests. Compare the offers on availability against your actual ledger, as well as on price. The funding search is for limited companies and LLPs, and for sole traders and partnerships borrowing more than £25,000.

Invoice finance cost calculator

The cash an invoice finance facility releases and its total cost for a year, with the service fee on turnover included.

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Questions people ask

What is confidential invoice discounting?

It is invoice finance where your customers are not told their debts have been assigned. You keep sending invoices and chasing payment in your own name, and customers pay into an account in your company’s name that the funder controls. The funder keeps the right to tell your customers and collect directly if you break the agreement or the company becomes insolvent.

How is invoice discounting different from factoring?

With discounting you keep credit control and the arrangement can be confidential. With factoring the funder collects the money and your customers pay it directly. Discounting has a lower service fee, but you do more reporting and the funder audits your ledger. Funders offer it to established businesses with reliable records and an existing credit control function.

What does an invoice discounting audit involve?

The funder’s auditor checks a sample of invoices against delivery notes, contracts and cash received, looks for credit notes, disputes and invoices raised early, and checks that customer payments went into the controlled account. The first audit happens before the facility starts and later ones follow on a schedule. You pay for them, and a poor result can reduce what you can draw.

Do I need a minimum turnover for invoice discounting?

Each funder sets its own minimum, and there is no rule that applies across the market. Funders look for enough turnover to cover the cost of audits and reporting, a finance function that can produce accurate ledger reports, and a record of collecting from customers. Smaller businesses are offered factoring or selective invoice finance.

Can I leave an invoice discounting facility?

Yes, by giving the notice in your agreement once any minimum term has ended. Leaving early can carry a termination fee. You or a new funder repay what is drawn, the funder releases its assignment and its charge at Companies House, and your customers carry on paying into your own account.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Invoice discounting

How invoice discounting works

Confidentiality

What the funder checks before and during the facility

What discounting costs over a year

Invoice discounting or factoring

Who invoice discounting suits

Invoice finance cost calculator

Questions people ask

Working capital

Invoice factoring

Selective invoice finance

Invoice finance

Revolving credit facility

Invoice discounting

How invoice discounting works

Confidentiality

What the funder checks before and during the facility

What discounting costs over a year

Invoice discounting or factoring

Who invoice discounting suits

Invoice finance cost calculator

Questions people ask

Working capital

Invoice factoring

Selective invoice finance

Invoice finance

Revolving credit facility

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