INVOICE FINANCE - invoice discounting 

Selective invoice finance

Selective invoice finance can help to speed up a business’ payment cycle for better cash flow. 

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What is selective invoice finance?

Selective invoice finance is a type of funding that can help a business’ cash flow with quicker access to the invoices they’re owed. Selective invoice finance allows businesses to unlock the value of their outstanding invoices before they're paid by customers. This means that you can access a portion of the funds tied up in your invoices without waiting for the usual payment terms.

The difference between selective invoice finance and invoice finance is that you do not use your entire debtor book to access funds. Instead, with selective invoice finance, you choose only certain invoices that you would like to advance. 

How selective invoice finance works

As the name suggests, selective invoice finance allows you to be selective. You can handpick specific invoices that you want to finance, giving you the flexibility to choose invoices from clients with longer payment terms or those that are larger in value.

Here’s how the process works: 

  1. Choose which invoices you would like to advance. 
  2. When you apply for selective invoice finance, the lender will evaluate the creditworthiness of your customers. This makes it particularly advantageous for small businesses  without an extensive credit history.
  3. Once approved, you'll receive an advance on the selected invoices, usually around 80-90% of the total value. The remaining portion is held as a reserve.
  4. When your customers pay the invoices, the selective invoice finance provider deducts their fee and releases the remaining reserve to you.

Advantages and disadvantages of selective invoice finance

Pros of selective invoice finance

  • By accessing funds tied up in unpaid invoices, you can better manage day-to-day operations, pay suppliers, and take advantage of growth opportunities without being held back by slow-paying customers.
  • Unlike traditional invoice factoring where all invoices are financed, selective invoice finance empowers you to choose which invoices to finance. This ensures you maintain control over your client relationships.
  • Many selective invoice finance providers offer credit insurance, protecting your business from the risk of non-payment by customers.
  • The application process is generally quicker and less intensive than traditional financing methods. This agility can be crucial when capitalising on time-sensitive opportunities.
  • Selective invoice finance is not a loan; you're essentially receiving an advance on money that's already owed to you. This means you won't be accumulating additional debt.

Cons of selective invoice finance

  • Selective invoice finance focuses on individual invoices rather than providing a consistent and ongoing source of capital, meaning you might not be able to access the funds needed if you have a limited number of invoices to finance.
  • The process of selecting, submitting, and managing individual invoices for financing can be administratively complex. This might require additional time and resources on the part of the business to ensure that the correct invoices are selected and processed.
  • Not all invoices are eligible for financing under selective invoice finance. This means that businesses might not be able to finance all of their invoices, limiting their flexibility.

Is selective invoice finance right for your business?

While selective invoice finance offers an array of benefits, it's essential to consider whether it aligns with your business's needs and objectives. Here are a few key considerations:

Nature of business

If your business relies heavily on invoicing and experiences occasional cash flow gaps due to longer payment terms, selective invoice finance could be a valuable solution.

Client relationships

Consider how your clients might react to you financing their invoices. If maintaining positive relationships is crucial, the selective approach might suit you better.

Cost vs. benefit

While selective invoice finance can be cost-effective in terms of maintaining operations and capitalising on growth, the associated fees should be weighed against the benefits.

Types of selective invoice finance

Selective invoice discounting 

Selective invoice discounting is a type of selective invoice finance that allows a business to choose specific invoices to sell to a finance provider. The business maintains control over which invoices are submitted for financing and keeps the responsibility of chasing the payment themselves. 

Spot factoring 

Spot factoring is where a business sells a single invoice (or a small batch of invoices) to an invoice finance provider. This method is suitable for businesses that occasionally need quick access to cash for specific invoices. Spot factoring is a quick and targeted solution for short-term financing needs. With spot factoring, the spot factoring provider assumes the responsibility of chasing the payment. 

frequently asked questions about selective invoice finance

While you have the freedom to select which invoices to finance, some finance providers might have restrictions on the types of customers they accept. This is because the creditworthiness of the customer impacts the risk associated with the financing.

Yes, in many cases, businesses can use selective invoice finance alongside other financing methods. However, it's important to communicate with both finance providers to ensure that the arrangements are compatible and won't create conflicts.

The minimum number of invoices required may vary among finance providers. Some might have minimum volume requirements, while others allow businesses to choose even a single invoice for financing. It's important to discuss this with potential finance providers.

Fees in selective invoice finance consist of a discount fee, which is a percentage of the invoice amount, and possibly other administrative charges. The exact fee structure varies among finance providers. It's essential to understand the fee structure and compare offers from different providers.