Invoice discounting – a powerful source of funding

Chartered Accountants Ireland Interim Managers’ member John Dunleavy explains the intricacies of invoice discounting

A critical element of any growth strategy is the ability to source funding. One option often misunderstood is invoice discounting, which can be a hugely powerful source of liquidity to fuel growth as it affords companies the opportunity to unlock cash tied up in their debtors’ ledgers.

Invoice discounting allows a business release cash tied up in its debtor book by financing qualifying debtors.  The customer retains control over the management of the debtors’ ledger and the funding can be provided on a disclosed or non-disclosed basis.  In comparison, some alternative debtor funding options, such as factoring, pass control of the ledger to the factoring company and is always disclosed to the debtor – essentially the outright sale of receivables.

How does invoice discounting typically work?

  1. Goods or services provided by a business are invoiced to a customer with payment terms.
  2. Those invoices are then sent to a receivables finance provider with a view to raising finance secured on the receivables.
  3. A percentage of the face value of the invoices (80-85%) is advanced to the business.
  4. The business usually continues to manage the debtor book, dealing with collections, customer queries, credit notes, etc.
  5. On receipt of the debtor payment, the remainder of the payment that was not financed is released to the business, less a service fee which includes the discount factor.

The big advantage with invoice discounting is access to liquidity, with most of the value of the invoice being paid almost immediately instead of waiting 30 to 60 days to receive payment.  Also, it gives a business an opportunity to fund growth by using the assets they already have on their balance sheet rather than other assets or personal guarantees.


Ireland has never been better served with invoice discounting providers than currently. With the recent credit restrictions and tightening of traditional lending to the SME sector, invoice financing has become a major source of working capital finance. It is also more attractive to the banks because of its secured nature (debenture charge over debtor book) and the fact that it carries a lower capital weighting for bank capital calculations.  In addition to the main domestic banks – Ulster Bank, Bank of Ireland and AIB – there are many bespoke invoice discounting providers in the market; Bibby Financial, Celtic Invoice Discounting, Capitalflow, Close Commercial Finance and Clancy Business Finance, to name a few.  All have their part to play in providing funding to the SME sector, the backbone of the economy.


The cost associated with invoice discounting is made up of two parts:

  • A service administration fee, which covers the delivery of the service and tends to vary with the value and volume of invoices put through the facility, and
  • A discount charge which is charged as a percentage over LIBOR against drawn funds calculated on daily outstandings (much like an overdraft rate). The charge tends to be debited at the end of each month.

Debtors’ ledger quality

One of the more positive aspects that has been found with customers who use invoice discounting is that they nearly always have very well-managed debtors’ ledgers: the discipline in managing their ledger is clearly linked to their ability to raise working capital on it.

The spread and quality of the debtors themselves and the availability of good proofs of delivery are also important considerations.

All growing SME businesses with debtors’ ledgers which churn within 30, 60 or 90-day cycles should look at the suitability of invoice discounting for funding their working capital needs.

Invoice Fair

An interesting development in relation to invoice financing has been the success of Invoice Fair: an online trading platform where progressive customers and sophisticated investors trade approved invoices. It is an exciting fintech development which allows an investor with liquidity to invest in invoice receivables, effectively a new asset class, and earn attractive returns and at the same time meet the funding needs of the customer.  Single approved invoices are sold through an on-line auction with the invoice purchase, settlement and security over the invoice all being managed through the on-line platform.  It’s an interesting development which looks sets to carve out its own niche.


So, in summary, SME’s should always consider invoice discounting and realise the potential it can bring to their business, especially in times of growth.  There is plenty of choice in the marketplace at present, which should ensure that service fees and discount rates remain competitive.  When looking at funding and the need for options and flexibility, invoice discounting can answer a lot of questions asked.

John Dunleavy, B. Comm, FCA, runs his own advisory business, Waltham Advisory, and is a member of CAIM.