Invoice discounting works by releasing cash from your invoices through a third party provider. It is similar to factoring but no credit management services are provided, meaning that you will need to collect your own outstanding invoices.

There are four types of invoice discounting.

 The first is confidential invoice discounting, where there is no disclosure on the invoices and the discounting company has no contact with your customers. As the name implies, confidential invoice discounting is confidential.

The second type is disclosed invoice discounting, whereby a disclosure notice appears on the invoice advising the customer of the third party involvement. This is considered to be lower risk than confidential invoice discounting, and is sometimes available when the lender is not prepared to offer confidential invoice discounting.

The third type of invoice discounting is recourse invoice discounting, which is cheaper than non-recourse invoice discounting as you continue to take the risk. Your contract will specify how many days after the payment due date you must refund the advance, should the invoice not be paid. This is easier to obtain, as the third party will tend to have less stringent rules.

The fourth type is the previously mentioned non-recourse discounting. This is where the third party provider does take on the bad debt risk. It is more expensive but means that you never have to repay the advance to the lender; however you do have to pay the interest for the period prior to the bad debt being paid. The third party provider will also pursue the customer for the debt and take any necessary legal action.