Accounting terms

Dictionary of all accounting terms





What is Invoice Discounting?

Invoice discounting is a financing method by which companies can get advances on the payments that their customers owe them on their invoices.

Invoice discounting means they get the cash faster than having to wait for the customers to pay, and it is a major way for businesses to meet their financial obligations and invest in their own growth.

The financing company will issue debt that is always less than the total amount on the outstanding invoice (about 80% of the invoice total for invoices less than 90 days old).

For the businesses using invoice discounting, they get to get cash much faster. In fact, they can get cash as soon as they issue the invoice to their customer.

Of course, the trade-off is that they will get roughly 20% less of their invoice amount.

In general, invoice discounting includes the following steps:

  • the goods or services are provided to the customer and the business issues an invoice
  • the business also sends details of the invoice to the financing company
  • the financing company provides funding (generally 80% of the face value of the invoice) to the business, usually within 48 hours
  • invoice collection is handled either by the business or the financing company's service
  • when the debtor (customer) pays the invoice, the balance is sent to the business minus a service fee

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