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ABC Finance » Invoice finance » Selective invoice finance

Gary Hemming Headshot

Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in invoice finance

Welcome to your comprehensive guide on selective invoice finance. This article is your one-stop-shop for understanding the ins and outs of this financial tool.

We’ll dive into the nitty-gritty of how it works, the different terms used to describe it, and the step-by-step process involved.

So, whether you’re a seasoned business owner or just starting out, this guide is designed to give you the confidence to navigate the world of selective invoice finance.

What is Selective Invoice Financing?

Selective invoice financing, also known as selective invoice factoring or discounting, is a flexible way for businesses to manage their cash flow. It’s a type of invoice finance that allows you to selectively choose which invoices you want to finance, rather than financing your entire sales ledger.

The purpose of selective invoice financing is to provide businesses with immediate cash, which can be crucial for growth, paying suppliers, or even just covering day-to-day expenses. It works by selling your chosen invoices to a finance company, who will then advance you a large percentage of the invoice value. The remaining balance, minus their fee, is paid to you once your customer settles the invoice.

This form of commercial finance is particularly beneficial for businesses with fluctuating cash flow or those that have seasonal demand. It offers a flexible, obligation-free way to access cash when it’s needed most.

Selective Invoice Finance, Single & Spot Factoring

Selective invoice finance goes by many names. You might hear it referred to as single invoice finance, spot factoring, or selective invoice factoring. These terms all describe the same process: selling individual invoices to a finance company to improve cash flow.

While the terminology may vary, the concept remains the same. Whether you call it selective invoice finance, single invoice finance, or spot factoring, you’re still using a specific invoice (or invoices) to secure funding. This flexibility is what sets it apart from full invoice factoring, where all invoices must be factored.

How does the process work?

The process of selective invoice financing is straightforward and can be broken down into a few simple steps:

  1. Select the Invoice: You choose the invoice or invoices you want to finance. This could be an invoice for a large order or from a customer who typically takes a long time to pay.
  2. Sell the Invoice: You sell the selected invoice to a finance company. They will typically advance you up to 90% of the invoice value within 24 hours.
  3. Customer Payment: Your customer pays the invoice directly to the finance company. This payment is made into a trust account in your business’s name.
  4. Receive the Remaining Balance: Once the invoice is paid, the finance company will give you the remaining balance, minus their fees.

Selective invoice financing can be a powerful tool for managing your business’s cash flow. It provides immediate access to cash tied up in invoices, allowing you to invest in growth, cover expenses, or even just provide a buffer for unexpected costs.

With its flexibility and lack of long-term obligation, it’s no wonder that selective invoice finance is a popular choice for businesses of all sizes.

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How does single invoice finance work?

Let’s delve a little deeper into the workings of selective invoice finance. Imagine you’re a business owner, and you’ve just completed a large order for a customer. You issue the invoice, but your customer’s payment terms are 60 days. That’s a long time to wait, especially if you have immediate expenses to cover.

This is where selective invoice finance comes into play. You can sell this invoice to a finance company, who will advance you up to 90% of the invoice value almost immediately. You’re no longer waiting for your customer to pay, and you have the cash you need to keep your business running smoothly.

When your customer finally pays the invoice, the payment goes to the finance company. They then give you the remaining balance, minus their fees. It’s a simple, effective way to manage your cash flow and ensure your business has the funds it needs to grow.

Who can apply?

We can fund the following:

  • Sole traders
  • Partnerships
  • LLPs
  • Limited companies
  • PLCs

How is my application assessed?

A large part of the assessment process hangs on the strength of the invoice that you’re looking to fund, and the nature of the works undertaken.

Where the company who are to pay the invoice are highly creditworthy, your chances of success are high. This is due to the fact that the lender is reliant on that business for repayment, not on your business.

This means that if you’ve suffered adverse credit, or your historic accounts do not show strong financial performance, you may still be eligible for borrowing.

Selective Invoice Finance

What are the risks of selective invoice discounting?

This method of funding is more expensive than full factoring or invoice discounting facilities on an invoice by invoice basis.

The main risk is that you become reliant on regularly funding the majority of your invoices to cover cash flow. Should this happen, it may prove to be an inefficient product, and consideration should be given to the idea of taking out a more permanent facility.

Spot invoice finance, step by step:

To make things even clearer, here’s a step-by-step guide to the process of selective invoice finance:

  1. Choose Your Invoice: Pick the invoice you want to finance. This could be a high-value invoice or one from a customer who usually takes a while to pay.
  2. Sell Your Invoice: Sell the chosen invoice to a finance company. They will typically advance you up to 90% of the invoice value within a day.
  3. Customer Pays the Invoice: Your customer pays the invoice directly to the finance company. This payment is made into a trust account in your business’s name.
  4. Receive the Balance: Once the invoice is paid, the finance company gives you the remaining balance, minus their fees.

What are the advantages?

Selective invoice finance offers a host of advantages for businesses. Here are a few:

  • Flexibility: You choose which invoices to finance, giving you control over your cash flow.
  • Immediate Cash: You receive up to 90% of the invoice value almost immediately, helping you cover expenses or invest in growth.
  • No Long-Term Obligations: Unlike other forms of finance, there are no long-term contracts or obligations.
  • Improved Cash Flow: By getting paid sooner, you can improve your cash flow and better manage your business finances.

As one business owner put it, “Selective invoice finance has been a game-changer for us. We no longer worry about cash flow, and we can focus on growing our business.”

What are the disadvantages?

While selective invoice finance offers many benefits, it’s not without potential downsides. Here are a few things to consider:

  • Cost: The fees associated with selective invoice finance can be higher than other forms of credit. It’s important to understand these costs before proceeding.
  • Customer Relationships: Your customers will know you’re using a finance company, which could potentially impact your relationship with them.
  • Dependence: There’s a risk of becoming dependent on invoice financing, which could cause problems if the finance company changes its terms or if you’re unable to factor an invoice.

Before choosing selective invoice finance, it’s crucial to weigh these potential disadvantages against the benefits. As always, it’s a good idea to seek advice from a finance professional to ensure you’re making the best decision for your business

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Is it a Good Idea?

Whether selective invoice finance is a good idea largely depends on your business’s specific circumstances. If your business often has to wait for long payment terms and this is causing cash flow issues, then selective invoice finance could be a fantastic solution. It provides immediate cash, allowing you to cover expenses, invest in growth, or even just provide a buffer for unexpected costs.

However, if your customers typically pay promptly, or if the cost of the finance company’s fees outweighs the benefits of immediate cash, then selective invoice finance might not be the best option. It’s also worth considering the potential impact on customer relationships, as your customers will know you’re using a finance company.

What are the Key Considerations of Selective Factoring?

When considering selective invoice finance, there are several key factors to keep in mind:

  • Cash Flow Needs: How urgently do you need the cash? If you’re facing immediate expenses or opportunities for growth, selective invoice finance can provide the cash you need quickly.
  • Customer Reliability: How reliable are your customers when it comes to paying invoices? If you have customers who often delay payment, selective invoice finance can help you manage this risk.
  • Cost Management: Can you manage the cost of the finance company’s fees? It’s important to understand these costs and ensure they fit within your budget.
  • Credit Control: Do you have the resources to manage the credit control process? Some finance companies offer credit control services, which can be a significant advantage for businesses without a dedicated credit control team.

What are the Alternatives?

While selective invoice finance is a powerful tool, it’s not the only option available. Here are a few alternatives:

  • Full Invoice Factoring: This is similar to selective invoice finance, but instead of choosing individual invoices to finance, the finance company manages your entire sales ledger. This can be a good option if you have a high volume of invoices and want to outsource your credit control.
  • Bank Loans and Overdrafts: Traditional forms of credit like bank loans and overdrafts can also provide the funding you need. However, they often require collateral and can be more difficult to obtain.
  • Asset-Based Lending: If your business has valuable assets, such as machinery or property, you could use these as collateral for a loan.
  • Crowdfunding or Venture Capital: If you’re a startup or growth business, you might consider raising funds through crowdfunding or seeking investment from venture capitalists.

Remember, every business is unique, and what works for one might not work for another. It’s always a good idea to explore all your options and seek professional advice before making a decision.

Related – Invoice finance guides.

What is the Difference Between Selective Invoice Discounting and Spot Factoring?

Selective invoice discounting and spot factoring are two forms of invoice finance that share similarities but also have key differences. Both methods involve selling individual invoices to a finance company to improve cash flow, but the way they handle customer payments and credit control varies.

Selective Invoice Discounting is a discreet form of invoice finance. In this case, your customers are usually unaware of your arrangement with the finance company. You remain in control of your sales ledger and continue to handle your own credit control. This method is often preferred by businesses that want to maintain direct relationships with their customers.

Spot Factoring, on the other hand, involves the finance company taking over the management of your credit control for the selected invoices. Your customers pay the finance company directly, and they are aware of your factoring arrangement. Spot factoring can be a good option for businesses that prefer to outsource their credit control or those with customers who are slow to pay.

FAQs

Here are some of the frequently asked questions that we receive about selective invoice finance.

Most businesses that issue invoices on credit terms to other businesses can qualify for selective invoice finance.

The key criteria are that you have creditworthy customers and invoices for completed work.

It’s not typically required for a business to have a certain turnover or trading history, making selective invoice finance accessible to businesses of all sizes, including start-ups.

The cost of selective invoice finance can vary depending on the finance company and the specifics of your business and invoices.

Typically, you can expect to pay a percentage of the invoice value as a fee. This fee usually ranges from 1% to 5%.

It’s important to clarify these costs with the finance company before proceeding.

Yes, it’s possible to get selective invoice finance even if your business has bad credit.

Finance companies are primarily interested in the creditworthiness of your customers, as they’re the ones who will be paying the invoices.

However, if your business has serious financial issues, it may affect your ability to secure invoice finance.

Recourse and non-recourse refer to who is responsible if a customer fails to pay an invoice. With recourse finance, if your customer doesn’t pay the invoice, the finance company will reclaim the funds they advanced you.

With non-recourse finance, the finance company assumes the risk of non-payment, protecting you from customer insolvency.

However, non-recourse finance is typically more expensive to reflect this additional risk taken on by the finance company.

In most cases, your lender will want to manage the process of collecting payment, although some providers are more flexible.

Where it’s important to you that control is retained, let us know and we’ll only approach funders who will allow you to do just that.