Invoice Discounting Definition and How it Works with Fast A/R Funding. Invoice discounting, factoring, invoice finance.  These terms all generally mean the same thing.
The term "discounting" in discounting invoice can be thought of in a couple of different ways.

1. Discounting can be applied to the "discount", or reserve that finance companies take when they advance money to your firm.  As an example, If you finance an invoice for $10,000 dollars with a factoring company they will typically advance you 80% of the invoice amount or $8,000 when the invoice is assigned to them.  You will receive the balance of the $2,000 (minus the fee charge by the finance company) back when your customer pays the invoice. The $2,000 can be viewed as the discount.

 

2. The second way to think of the term "discounting" is the amount the finance company will charge you for the service of advancing you funds when you create the invoice instead of having to wait until the invoice is paid.  In our same example above the finance company may charge you 2% of the invoice value for the service.  In this case that would be $200.  You could view the $200 as the "discounting" fee.

There are many variations to the scenario above and different finance companies have different processes.  The following is a list of some the main components of a discounting invoice facility:

• The finance company will require your customers to pay them directly.
• Your invoices will be labeled as being sold to a finance company.
• The fee you pay will be based, in some manner, on how long it takes your customers to pay.
• If your customers don't pay then you will be responsible for the advances that the finance company made to you.