Invoice Discounting: What It Is & How It Works

Cash flow is the lifeblood of any business. Even profitable companies can face challenges when customer payments are delayed. As a solution, many business owners turn to invoice discounting, which allows you to unlock funds tied up in unpaid invoices and access working capital sooner.

In this article, we’ll explain what invoice discounting is, how invoice discounting works, and highlight when it may be the right tool for your business. We’ll also look at how platforms like Flex can complement this approach by providing extended payment terms and streamlined payment options without the complexity of traditional financing.

What is Invoice Discounting?

Invoice discounting is a type of short-term borrowing that allows businesses to use unpaid customer invoices as collateral to receive immediate cash from a lender.

Instead of waiting 30, 60, or even 90 days for customers to pay, a business can unlock a percentage of the invoice value upfront. When the customer eventually pays the invoice, the business repays the lender (including any agreed-upon fees or interest).

How Does Invoice Discounting Work?

The process typically follows these steps:

1. The business issues an invoice to a customer.
2. The invoice is submitted to a lender or financial institution.
3. Advance payment is provided, usually between 80%–95% of the invoice value.
4. The customer pays the invoice directly to the business.
5. Business repays the lender the advanced amount, plus fees or interest.

Here’s a simplified comparison of what happens with and without invoice discounting:

‍

Invoice Discounting in Action

For example, let’s say a marketing agency completes a $50,000 campaign for a client and issues an invoice with net-60 terms. Rather than waiting two months to receive payment, the agency uses invoice discounting to immediately access $45,000 (90% of the invoice value). This cash covers payroll, software costs, and ad spend while waiting for the client’s payment. Once the client payment goes through, the agency is able to use those funds to pay back the lender.

Real-World Examples

Out in the real world, invoice discounting may look like this:

• A construction company that regularly bills large projects with 90-day terms uses invoice discounting to cover material costs for other jobs in the meantime upfront.
• An eCommerce brand working with wholesale partners unlocks cash from pending invoices to ramp up inventory ahead of holiday demand.
• A consulting firm smooths payroll obligations during slower-paying client cycles.

Advantages of Invoice Discounting

Businesses often turn to invoice discounting because it:

• Improves cash flow by unlocking funds quickly
• Supports growth without waiting for customer payments
• Maintains control so you can still manage your own general ledger and customer relationships
• Is flexible, scaling with the size of your invoices

When Invoice Discounting Makes Sense

Invoice discounting isn’t the right tool for every situation, but it can be particularly useful when:

• You’re a growing business in need of a more steady cash flow to fuel operations
• Your customers often request longer payment terms (e.g., net-60 or net-90)
• You need to bridge the gap between delivering services and receiving payment
• You want to avoid taking on long-term debt

Risks, Costs, and Downsides of Invoice Discounting

While invoice discounting can provide quick access to cash, it’s not without its trade-offs. Business owners should be aware of the following potential drawbacks:

• Fees and Interest Costs: Lenders often charge fees or interest on the advanced funds. These costs can add up over time, making invoice discounting more expensive than other financing options.
• Dependence on Customer Payments: If a customer delays payment or defaults on an invoice, your business is still responsible for repaying the lender. This can create an added risk and potential cash flow strain.
• Not Always Suitable for Smaller Businesses: Lenders may require a strong track record, a minimum invoice volume, or creditworthy customers. Smaller or newer businesses might find it harder to qualify.
• Impact on Margins: Giving up a portion of your invoice value in exchange for early access to funds can reduce overall profitability, especially if discounting becomes a frequent necessity.
• Hidden Fees or Complex Terms: Some agreements include setup charges, monthly minimums, or additional administrative costs. It’s important to read the fine print and fully understand the total cost of financing ahead of time.

In short, invoice discounting can be a valuable short-term solution, but it should be weighed carefully against the risks and long-term financial impact.

Invoice Discounting vs. Alternatives

Invoice discounting is often compared with factoring, credit lines, or extended terms from business credit cards.

• Factoring: Involves selling invoices to a third party, who may then manage collections directly.
• Traditional loans: Provide funds but require fixed repayment schedules and often more paperwork.

With Flex, for example, businesses don’t need to hand over invoices to access funds. Instead, they can:

• Use the Flex Credit Card for everyday spend with 60 day float
• Pay vendors upfront through Bill Pay, while extending repayment timelines
• Keep control of customer relationships while optimizing cash flow

This can make Flex an appealing complement—or even an alternative—to invoice discounting for many businesses.

Final Thoughts

Invoice discounting can be a powerful financial tool, giving businesses faster access to funds locked up in unpaid invoices. By smoothing cash flow, it helps cover expenses, fuel growth, and reduce stress caused by late payments.

While invoice discounting has its costs, it’s often a smarter alternative to waiting weeks or months for customer payments. And with solutions like Flex Bill Pay and the Flex Credit Card, businesses have additional options to keep operations moving without being at the mercy of long invoice cycles.