Understanding Invoice Discounting in South Africa: A Practical Example

Invoice discounting is a financial strategy that allows businesses to unlock the value of their accounts receivable by selling their unpaid invoices to a third-party financier at a discount. This method provides immediate working capital, aiding in cash flow management and ensuring smooth operational continuity. In South Africa, where businesses often face long payment cycles, invoice discounting can be particularly beneficial.


How Invoice Discounting Works

In essence, invoice discounting involves a business selling its unpaid invoices to a discounting company. The discounting company advances a percentage of the invoice value immediately, charging a fee for the service. The fee is typically based on the period until the invoice is paid and an agreed-upon monthly rate.


A South African Example

Consider a South African tech company, which provides IT services to various clients. The company issues an invoice of R 200 000 to a client with a payment term of 30 days. Instead of waiting for a month, the company decides to use invoice discounting to get immediate cash to manage its expenses and invest in a new project.

The discounting company agrees to advance 80% of the invoice value upfront. The agreed upon rate for the discounting service is 0.150% per day on the amount paid to the company. Here’s how the process unfolds:

  1. Invoice Value: R 200 000
  2. Advance Percentage: 80 %
  3. Advance Amount: 80% of R 200 000 = R 160 000
  4. Daily Rate: 0.150% per day
  5. Payment Term: 30 days

To calculate the cost of discounting for 30 days:

  • Daily rate = 0.150% x 30 days
  • Total costs for 30 days = R 160 000 x 4.5%= R 7 200

At the end of the 30-day period, the discounting company will collect the full invoice amount (R 200,000) from the company’s’ client. The company will receive the remaining balance after the costs have been deducted. In this case, the total cost is R7 200, so the final settlement will be:

  • Remaining Balance = R 200 000 – R 160 000 (advance) – R 7 2000 (cost) = R 32 800.


Benefits of Invoice Discounting

  1. Improved Cash Flow: By receiving immediate cash, businesses can manage their day-to-day expenses more efficiently.
  2. Flexibility: Unlike traditional loans, invoice discounting doesn’t create debt on the balance sheet.
  3. Growth Opportunities: Immediate funds can be reinvested in business growth opportunities, such as purchasing inventory, hiring staff, or expanding operations.
  4. Credit Control: The business retains control over its sales ledger and client relationships.



Invoice discounting is a valuable tool for South African businesses to optimize their cash flow and maintain financial stability. By understanding the cost and benefits associated with this service, businesses can make informed decisions to support their financial health and growth aspirations. The example above, illustrates how a company can leverage invoice discounting to bridge cash flow gaps, demonstrating its practical application in a real-world scenario.