Invoice discounting
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You sell your unpaid invoices to a finance provider and get cash now, while you keep collecting from your buyers.
Terms like this have a quick explainer. Tap or hover on them.
01 · In plain words
You sell your unpaid invoices for cash now, and your buyer pays later
When you sell goods on credit, you wait for your buyer to pay. lets you get that money sooner, less a charge. You sell your unpaid invoices to a finance provider, such as a bank. It pays you less than the full invoice amount. The difference is its , its charge for paying you early (Global Supply Chain Finance Forum).
The Global Supply Chain Finance Forum (GSCFF) treats invoice discounting as another name for . A receivable is money a customer owes you. You can sell one invoice or many (GSCFF).
You still run your own customer accounts. You keep your , your record of invoices and payments, and you chase payment yourself (GSCFF).
Your buyer may or may not be told. In the form, the buyer is not told and pays as usual. In the disclosed form, the buyer is told (GSCFF).
Who is involved
- The seller, for example an exporter, sells its invoices and keeps running its customer accounts.
- The finance provider, a bank or specialist finance company, buys the invoices and pays the seller early.
- The buyer, for example an importer, owes the money on the invoices. It is not a party to the finance deal, but the finance provider relies on it to pay.
- A is a bank account in the seller's name. The buyer pays into it. Only the finance provider can take money out.
02 · How it works
Seven steps take an invoice from the agreement to final payment
Figure 1 · Interactive
Invoice discounting, step by step
Read down the steps. The last step is where the seller gets any money still owed.
Source: Global Supply Chain Finance Forum, Receivables Discounting, October 31, 2024 (transaction illustration).
03 · What it means for you
The seller gets cash early and keeps its customer contact, and the buyer pays the invoice as agreed
Figure 2 · Interactive
What invoice discounting means for each side
Choose your side of the trade.
04 · Worked example
Drawing $800,000 for 45 days at an illustrative 6% a year costs $6,000
This example uses round, made-up numbers to show how the cost builds up. The seller has $1,000,000 of unpaid invoices. The finance provider makes 80% of that available, so the seller draws $800,000 for 45 days. Here the charge is worked out as interest on the money drawn. The rate is a of 4.00% plus a of 2.00%, so 6.00% a year. Interest is worked out on a 360-day year, the basis the Federal Reserve uses for its money market rates (Federal Reserve, H.15). That counting rule is the . Real rates vary by finance provider, country and deal.
Figure 3 · Illustrative
Cost of drawing $800,000 against $1,000,000 of invoices for 45 days
Illustrative inputs. The cost is highlighted.
Made-up rates, worked out by our checking script. Your finance provider's charges will differ by provider, country and deal.
05 · When to use it
Invoice discounting suits sellers who want cash against invoices and run their own collections well
Good fit when
- You want cash against your invoices and want to keep the deal confidential from your buyers (GSCFF).
- You already run your sales ledger and credit control to a standard a finance provider will accept (GSCFF).
- You want to sell one invoice or many, as suits you (GSCFF).
Another tool may suit better when
- Your credit control does not yet meet a finance provider's standards (GSCFF). Compare options in Factoring vs invoice discounting.
- You want to pass the risk of a buyer not paying to someone else, and the facility keeps recourse. Look at factoring or trade credit insurance.
- You want to compare the two side by side. Read Factoring vs invoice discounting.
06 · Rules and a real case
Your contract sets the rules, and a court has held guarantors to it
The RPA between the seller and the finance provider sets the terms. The GSCFF Standard Definitions, published in 2016 by BAFT, EBA, FCI, ICC and ITFA, describe the technique (GSCFF). The UN Convention on the Assignment of Receivables in International Trade, agreed in New York in 2001, has not yet entered into force. Its parties are Liberia (2005) and the United States (2019) (UNCITRAL).
A real case. In Close Invoice Finance Ltd v Watts, decided on September 2, 2009, the Court of Appeal of England and Wales looked at a discounting agreement dated August 23, 2005. Close agreed to buy the invoices of Haydon & Jackway Limited, a company that imported and distributed window fashions, at their face value. Close was to pay 80 percent of the value of each invoice up front. The two defendants had jointly promised to cover Haydon's duties to Close, up to GBP 50,000. This promise is called a guarantee. Haydon went into administration, a formal insolvency process, on January 22, 2007. Close demanded GBP 50,000 under the guarantee. The court held that there was no defense to the claim on the guarantee (Court of Appeal judgment).
Summary
Invoice discounting turns unpaid invoices into cash now, while the seller keeps its customer contact
The seller sells its invoices to a finance provider and gets the discounted value early. The seller keeps running its own accounts, and the buyer pays the invoice on the due date. The RPA decides who carries the risk if a buyer does not pay, so read it closely.
Related guides: Receivables finance; Factoring vs invoice discounting; How trade finance is priced. Related cards: Factoring; Trade credit insurance; Open account. Every term is in the Trade Finance Glossary.
Sources
- Global Supply Chain Finance Forum, Receivables Discounting, October 31, 2024. Supports: definition, parties, disclosed and confidential forms, recourse, the seven-step flow
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance, 2016. Supports: the publishers of the standard definitions
- UNCITRAL, Status: United Nations Convention on the Assignment of Receivables in International Trade (New York, 2001), undated. Supports: the convention's status and parties
- Court of Appeal (Civil Division), England and Wales, Close Invoice Finance Ltd v Watts & Anor [2009] EWCA Civ 1182, September 2, 2009. Supports: the real case
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: the 360-day year in the worked example
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