Selective invoice discounting is a means by which a company can finance its operations by receiving cash in the form of a loan from an unpaid invoice. A finance provider will lend the company a percentage of the value of the invoice for a fee.
The company can then have access to cash from its unpaid sales, thereby improving its working capital and investment opportunities when cash flow is short or business is slow. It remains the responsibility of the company to issue the invoice to its customer and chase up payment.
What is selective invoice finance?
Single invoice financing, often known as spot factoring, allows you to release money against a single or a number of bills. A large cash injection can be obtained once the facility is in place, and you can utilize it as you see fit.
How does selective invoice discounting work?
When it comes to invoice discounting, one of the largest high street banks has defined it as “a corporation borrowing their own money.”
You can get a share of the invoice’s value from the finance provider when you issue an invoice under this arrangement. However, there are various invoice financing solutions that allow you to obtain up to 95 percent or even 100 percent of the total amount of your invoices.
It’s essentially a loan from the supplier that you’ve obtained. In spite of the fact that the funds were yours, to begin with, the lender nevertheless demands some type of compensation. A portion of the invoice amount that isn’t paid by the debtor goes toward the lender, and the rest is paid to you, less a small percentage.
A company will decide that it wants to release some capital from an unpaid invoice. It will then assign the invoice to a selective invoice discounting provider.
The provider will approve the invoice and come to an agreement on its terms and conditions. This will include a quote and terms on the conditions of repayment of the loan. The loan quote will cover up to 95%, but in most cases, around 70 to 85% of the value of the invoice.
This amount will be advanced as a loan to the company.
The loan plus the finance provider’s fee is to be repaid subject to the terms and conditions agreed upon. The company will receive the outstanding balance of the invoice once they have received full payment from the customer, and it is up to the company to chase up the outstanding debt.
Lenders such as Bibby, Llyods Bank, or Nucleus will be able to provide you with a selective invoice discounting facility.
Advantages of selective invoice discounting
- Available to a wide variety of businesses, including new starters
- Releases cash locked into customer invoices
- No long-term contracts with the financial provider
- Increased cash flow for the company, increased working capital, reduced need for overdrafts or other debt facilities
- No security is required, just an unpaid invoice
- No impact to the company on relations with customers. The discount company has no contact with the customer
- The company selling the goods and services maintains control over sales receivables
- Confidentiality is maintained as suppliers and customers don’t need to know that finance is obtained against sales invoices
- Company and customer benefit as the company has cash and the customer has credit facilities helping to maintain good relations
Some companies may only be eligible for this type of financing if they have established credit management procedures in place. It’s possible that they’ll ask for a certain quantity of turnover or a specific amount of time in trading. It’s possible that a supplier will charge a higher interest rate if they lend to a smaller business.
Disadvantages of invoice discounting
However, there are also several reasons why invoice discounting might not be the right option:
- Fees and other borrowing expenses may be greater than with other types of financing.
- It may be more difficult to secure other types of financing if you enter into an agreement for invoice discounting.
- To compensate for the fact that some of the invoice value will be diverted to your lender, your profit margin will be lowered.
- Due to this, invoice discounting may be useless if you constantly bill members of the general public for your products or services.
- Before you are approved for invoice discounting, your credit will be checked.
Having an invoice discounting arrangement in place might lead to you becoming accustomed to receiving payment as soon as an invoice is issued, making it difficult to terminate it. As a result, it can be difficult to adapt to a situation in which invoice payment dates are more
Get in touch with us at Funding Bay for your invoice financing needs.
Check out our invoice finance calculator here.
