Navigating Volatility: 10 essential considerations for Invoice Discounting


Andrew Rutherford asset based lending

The decision by the Bank of England to maintain interest rates at 5.25% in November to help curb inflation is welcoming news by some business groups.

However, businesses still find themselves at a crossroads as the likelihood of a decrease in interest rates in the near future looks minimal.

The move to raise interest rates by 0.25% to 5.25% in August triggered business owners to re-evaluate their financial strategies, as interest rates soared from their historic low of 0.1% in December 2021 to a 15-year high after 14 consecutive increases.

As we are now in the final quarter, SMEs are confronting the challenge of navigating a complex landscape, with direct implications for borrowing costs and day-to-day expenditures.

In these uncertain times, businesses are actively pursuing more flexible solutions. One such strategy that has recently gained considerable traction, particularly among SMEs, is invoice discounting.

This funding method provides businesses with a streamlined route to access working capital for growth, enabling them to convert outstanding invoices into cash within just 24 hours.

Unlike traditional finance methods – that often rely on historical balance sheet data that might not accurately depict current performance or future potential – invoice discounting is closely linked to ongoing sales performance.

This financing tool offers businesses the flexibility to manage cash flows without the rigidity of fixed repayment schedules. Invoice discounting liberates funds otherwise tied up in the sales ledger, giving businesses the freedom to pursue a range of objectives.

From sustaining day-to-day operations and procuring stock to securing supplier discounts through prompt payments and even embarking on strategic acquisitions, the solution is renowned for its versatility.

In addition to being a valuable financial tool, invoice discounting also forms the core of asset-based lending solutions, supplemented by loans against stock, plant & machinery, and property.

Cash flow loans may also be available in the right circumstances to secure higher levels of working capital – allowing businesses to pursue organic growth and acquisitions.

Businesses require financial solutions that align seamlessly with their growth plans. That is precisely what invoice discounting provides, but before considering this type of finance, gaining a clear understanding of its suitability requirements and lenders’ evaluation criteria is of paramount importance.

To do this, you should consider the suitability of the solution for the client and the eligibility of the lender.

Solution suitability


  1. Alignment with growth plans

Gauge how well invoice discounting matches the business’ growth aspirations. It offers the flexibility to keep pace with business expansion and capitalise on emerging opportunities without frequent rounds of funding negotiations.

  1. Navigating seasonal fluctuations

For businesses susceptible to seasonal shifts in demand, invoice discounting can act as a financial bridge, smoothing over cash flow gaps connected with the natural ebbs and flows of your client’s business cycle.

  1. Managing payroll obligations

If a business relies on meeting regular payroll commitments or employs contractors on weekly or monthly terms, invoice discounting ensures that the business is equipped to fulfil these responsibilities.

  1. Taming extended payment cycles

Businesses dealing with customers who adhere to extended payment cycles could potentially benefit from an invoice discounting facility to alleviate the strain of delayed payments on cash flow.

  1. Facilitating stock acquisition

For businesses that require a substantial injection of working capital to maintain optimum stock levels, this form of funding can facilitate timely payments to suppliers.

 Lender Eligibility


  1. Minimum turnover criteria

Invoice discounting is not often suited to start-ups and should be considered by well-established companies with annual turnovers surpassing £500,000 or more.

  1. Credit terms

In the context of lender eligibility, if the business operates within credit terms ranging from 30 to 90 days, an invoice discounting solution could be an appropriate tool to proficiently manage cash flow and working capital.

  1. Operational efficiency

The ability to implement effective systems and procedures is a vital aspect of administering invoice discounting and instils confidence in lenders. Robust financial administration equips the business to manage this financing approach effectively and provide the lender with the necessary data during their audits.

  1. Diverse customer base

Lenders are more inclined toward businesses with a broad customer portfolio. Maintaining a diverse range of customers diminishes reliance on a few customers for revenue generation, enhancing financial stability.

  1. In-house credit control

Efficient debt collection processes contribute to smoother cash flow and a more resilient financial standing, essential for running a facility of this kind.

Alongside these considerations, it is important to note that with invoice discounting you will be incurring interest on the advanced amount, similar to an overdraft (referred to as a discount fee). Additionally, there is a service fee, which constitutes a second cost to factor in.

In the prevailing interest rate environment in which we find ourselves, business owners must allow themselves the time and space to conduct a comprehensive assessment of alternative funding options, as this strategic decision can spell the difference between the ability to survive or thrive.

Both traditional funding and invoice discounting have strong roles to play. However, invoice discounting, with its direct link to sales performance, flexibility in combination with additional assets, and uninterrupted access to working capital, has emerged as a strategic choice for ambitious SMEs looking to drive growth.