A traditional invoice finance arrangement would normally involve outsourcing your entire charging process to the finance provider, so the provider would lend you money against every one of your invoices and would maybe also chase up payment on these invoices on your behalf where necessary.
However, some providers allow for ‘selective invoice finance’. Here, you make a decision on each specific invoice as to whether you wish to enter into a finance arrangement, or whether you simply want to issue the invoice and collect the payment from the supplier yourself.
Selective invoice finance is sometimes known as ‘spot factoring’ or ‘single factoring’.
So, why might you want to use selective invoice finance? Here we look at some of the main advantages.
Flexibility
The most obvious reason for using this approach is that you retain a degree of control over the invoicing process, as you can choose which invoices to outsource and which to keep entirely in-house.
It’s not a hard and fast rule but, in general, you should expect to receive a higher proportion of your invoices as an upfront payment with a selective approach. It’s not uncommon for as much as 95% of the value to be advanced under a selective invoice finance arrangement.
No lengthy contract
With traditional invoice finance, you usually enter into an agreement with the finance company to cover your invoices for an extended period of time. However, there is no such long-term arrangement with selective invoice finance.
Retain credit control responsibilities
Selective invoice finance doesn’t usually involve the finance provider chasing up unpaid invoices on your behalf, as would be the case with most factoring arrangements. This means that you stay in control of the credit control process and your clients need never know that you have entered into a finance arrangement regarding their specific invoice.
Can be good for seasonal businesses
If your business is of a seasonal nature, where you do much more business at certain times of the year, selective invoice finance can work out much cheaper than conventional invoice finance.
Bad debt protection is still available
Just as with standard invoice finance, selective invoice finance can be set up with a ‘non-recourse’ option, where the lender becomes liable for any invoices where the client simply fails to pay at all.
Other advantages
Otherwise, the main advantages of selective invoice finance are similar to the benefits of any other invoice finance arrangement:
- It’s easy to predict when the cash will arrive in your business, as you will receive a significant proportion of the invoice’s value at the time you issue the payment demand, so this can help massively with cash flow management
- It’s much easier to repay your own credit commitments if you know exactly when the cash from the invoices you issue will be received, and if you use invoice finance, then you know you will get a payment from the provider very shortly after you issue an invoice
- Funds you receive from an invoice finance arrangement can be used for any business purpose, so you might choose to purchase stock, buy new equipment, repay debts or recruit new staff
Potential disadvantages
However, selective invoice finance could have the following drawbacks:
- It might only be offered to established businesses which have been trading for a defined length of time (e.g., six months) and/or has turnover above a specified amount (perhaps £100,000 per annum) and/or issues invoices for larger amounts. Selective invoice finance could therefore be ‘off limits’ for smaller businesses
- There’s a danger that, under the ‘sod’s law’ principle, the invoices you include in the selective arrangement will be the ones that are paid promptly, while those that you handle yourself will be those where you have difficulty obtaining payment
- It can take a few weeks to set up a selective invoice finance facility, so this approach may not provide your business with a rapid cash boost
Get in touch with the team at Funding Bay and use our Invoice Finance Calculator to find out if selective invoice finance is the best funding option for your business.
