What is Invoice Discounting and How Does It Work?

What is invoice discounting

Invoice discounting is a financial service that offers businesses a way to improve cash flow by unlocking the funds tied up in their unpaid invoices. For South African businesses, this can be a vital tool, especially for small and medium-sized enterprises (SMEs) facing cash flow challenges. Let’s delve into what invoice discounting is and how it operates within the South African context.

Understanding Invoice Discounting

Invoice discounting allows businesses to receive a substantial portion of their outstanding invoice values before their customers pay. Instead of waiting 30, 60, or 90 days for customer payments, companies can access most of their invoice values immediately. This financial solution helps businesses manage their cash flow more effectively, ensuring they have the necessary funds for day-to-day operations.

How Does Invoice Discounting Work?

Generating Invoices: Once a business delivers goods or services, it issues invoices to its customers, detailing the amount owed and the payment terms.

Approaching an Invoice Discounting Provider: The business approaches a financial institution or a specialist provider to arrange invoice finance. In South Africa, several banks and independent firms offer this service.

Verification and Advance: The provider verifies the invoices and advances a percentage of the invoice value, typically between 70% and 80%. The remaining percentage is held as a reserve.

Customer Payment: The customer pays the full invoice amount directly to the business, which then settles the outstanding amount with the invoice discounting provider, minus any fees. Note that it is a requirement to open a new business bank account that the financial institution has access to.

Completion: Once the provider receives the balance, they release the reserve amount (minus their fees) to the business, completing the transaction.

Benefits of Invoice Discounting

Improved Cash Flow: Immediate access to funds from unpaid invoices helps businesses cover operational expenses, invest in growth opportunities, and navigate financial gaps.

Confidentiality: Unlike factoring, invoice discounting is typically confidential, meaning customers are unaware that a third party is involved.

Flexibility: Businesses can use the service as needed, making it a flexible financial tool to manage cash flow.

Maintain Control: Companies retain control over their sales ledger and customer relationships, ensuring that their operations remain smooth.

Invoice Discounting in the South African Context

In South Africa, SMEs often face significant challenges related to cash flow due to the extended payment terms common in many industries. Invoice finance provides a practical solution to these challenges by offering immediate access to working capital.

Example Scenario:

Consider a local manufacturer in Durban that supplies goods to large retail chains. These retailers often have payment terms of up to 90 days. By using invoice discounting, the manufacturer can unlock up to 80% of the invoice value immediately. This allows the business to purchase raw materials, pay employees, and cover other operational costs without waiting for the retailers to settle their accounts.

Choosing an Invoice Discounting Provider

When selecting an invoice discounting provider in South Africa, businesses should consider the following:

Reputation and Experience: Choose providers with a solid track record and positive reviews from other businesses. At Premier Finance we vet our finance partners, ensuring that you only work with the best.

Fees and Costs: Understand the fee structure, including any hidden costs, to ensure that the service is cost-effective.

Service Flexibility: Ensure the provider offers flexible terms that align with your business needs.

Customer Support: opt for providers that offer robust customer support to assist with any issues or queries.


Invoice discounting is a valuable financial tool for South African businesses looking to improve cash flow and maintain smooth operations. By leveraging the value of their unpaid invoices, companies can access the working capital they need to thrive in a competitive market. For many SMEs, this service can make the difference between stagnation and growth, providing the financial stability required to succeed.

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