Invoice discounting, also known as invoice financing, is a process that involves companies using unpaid customer invoices as collateral for loans. With invoice discounting, a business sells unpaid invoices to a third-party factoring company in exchange for a cash advance, typically 80-90% of the invoice value. Once the customer pays the invoice, the factor releases the remainder of the invoice value, minus a small factoring fee. Invoice discounting is similar to invoice factoring, with one notable difference.
Unlike invoice factoring – where the customer sends invoice payments to the lender – confidentiality is maintained during invoice discounting. Payments in this financing method are still sent from the customer to the business, as the customer is entirely unaware of the lender’s involvement.