Invoice discounting is a financial practice used by businesses to improve cash flow by borrowing money against their outstanding invoices. It's a form of short-term borrowing where a company sells its accounts receivable (invoices) to a third party at a discount to receive immediate funds.

Here's a brief overview of how invoice discounting works:

Businesses Provide Goods/Services: A business provides goods or services to its customers and issues invoices with payment terms.

Selling Invoices: Instead of waiting for the payment term to elapse, the business sells these unpaid invoices to a financial institution (like a bank or a specialized invoice discounting firm) at a discount. The discount is usually a percentage of the total invoice value.

Receiving Immediate Funds: Upon verifying the invoices, the financial institution provides the business with a percentage of the invoice value upfront, typically around 70-90% of the total value. The remaining percentage, minus fees, is paid once the customer settles the invoice.

Collection and Repayment: The financial institution takes over the collection process and collects the full invoice amount from the customers. Once the customer pays the invoice, the remaining percentage is released to the business, minus the discount fee charged by the financial institution.

Invoice discounting helps businesses access immediate cash flow without waiting for their customers to pay, enabling them to cover operating expenses, invest in growth, or manage unforeseen financial needs. However, it's important to note that it's not a loan but a way to leverage the value of outstanding invoices.

This financial strategy can be beneficial for businesses facing cash flow challenges, seasonal fluctuations, or those looking to reinvest funds back into their operations. However, it's crucial to carefully consider the fees and terms associated with invoice discounting before choosing this option, as it may impact profit margins in the long run.