Selective Invoice Finance Explained

Conrad Ford

Written by Conrad Ford on March 20, 2019

Updated March 20, 2019

Man in warehouse checking invoices

According to research carried out by The Sage Group, 17% of invoices issued by small to medium-sized enterprises (SMEs) are paid late; 50% of those that receive late payments say it has an impact on their ability to operate effectively and can lead to their paying suppliers – or their staff – late.

If you’re struggling to get your customers to pay on time, and to manage your cash flow as a result, invoice financing might be a solution, offering as it does the ability to take out short-term loans using unpaid invoices as collateral.

There are a number of different types of invoice financing, including invoice factoring, invoice discounting and selective invoice financing.

What is Selective Invoice Financing?

An alternative form of financing (as opposed to more traditional methods including bank loans and overdrafts), selective invoice financing is designed to be easy to use and responsive to your company’s cash flow requirements.

It allows you to raise money using your unpaid invoices as collateral. You choose how many invoices you want to loan money against and submit these to an invoice financing specialist (or lender). They then loan you up to 100% of the value of the invoice(s), for which you pay a processing fee.

Selective invoice financing is different from invoice factoring and invoice discounting because it’s designed to be a one-off process, meaning you won’t get hit by ongoing administrative fees. It’s ideal if you have high-value invoices that are having an impact on your cash flow in the short term.

Selective Invoice Financing is sometimes called spot factoring. However, spot factoring has different meanings depending on who you’re speaking to. Therefore, it’s important to check just what you’re getting if the latter term is used.

Who is eligible for Selective Invoice Financing?

All invoice financing is designed for business to business (B2B) companies, not those that sell to private individuals (or consumers). Each invoice financing company will have a different set of eligibility criteria. In general, however, they will require you to have:

  • An annual turnover of at least £25,000
  • Credit terms of between 30 and 90 days
  • UK-based business customers.

As long as you’re a B2B business, there aren’t any exclusions as to the sector you work in or the work you do, though seasonal businesses find invoice financing works particularly well for them as it helps them manage fluctuations in their cash flow.

With Selective Invoice Financing, lenders prefer to work with established businesses whose customers are long-standing and have good credit ratings. This is because they are taking a higher level of risk by loaning money against only one, or a few, invoices; there is a greater chance they will lose their money if these customers don’t pay as opposed to invoice factoring which involves loaning money over a larger number of invoices on an ongoing basis.

Lenders will want to know your trading history and the history of your customers, including whether they generally pay their invoices on time and their financial standing as the invoices normally submitted through Selective Invoice Financing tender to be of a higher value.

The benefits of Selective Invoice Financing

Selective Invoice Financing is a great way to manage your cash flow or take out a short-term loan to support business growth. It has other benefits too, including:

  • Commitment: There is no long-term commitment with Selective Invoice Financing, and you don’t need to sign any agreements that include annual or monthly management fees. You simply pay a fee for the invoices you loan money against.
  • Fees: There is no complicated fee structure with this type of financing; you pay a one-off fee for each invoice (or batch of invoices) processed, which you are told up front.
  • Access: Almost as soon as you are approved by the lender and submit your invoice, you have access to your money, which could be up to 100% of the value of the invoice.

Remember, your lender might carry out credit checks on the customers whose invoices you are borrowing against. They will be aware of this, which could have an impact on your reputation. If you are worried about this, check with the lender as to whether a credit check will be carried out. Alternatively, use invoice discounting, which doesn’t require credit checks.

The downsides of Selective Invoice Financing

For all the benefits of Selective Invoice Financing, there are also downsides. The main one is it doesn’t work as well if your invoices are of a lower value because you may have to submit a large number in order to reach the loan value you need, and this isn’t what lenders want to see. They are expecting one or a few invoices to be submitted; if you try to submit more, your application may not be approved.

If your invoices are predominantly of a lower value, looking at invoice factoring or invoice discounting instead, both of which still offer opportunities to borrow money against outstanding invoices.

How to apply for Selective Invoice Financing

You apply for Selective Invoice Financing in much the same way as you would any other form of lending, submitting an application to a lender who will carry out a series of due diligence checks to assess the level of risk associated with lending you money. This risk will determine what percentage of your invoice they’ll loan you and, possibly, the fee you’ll pay.

While due diligence will be different for each lender, in general, it will include reviewing your accounts receivables, running a credit check on your company, and asking about any liens against your business, your invoices or your taxes.

The Selective Invoice Financing process

Once you’ve been approved, Selective Invoice Financing works in the following way:

    1. You invoice your client

    2. You submit your invoice(s) to the lender

    3. The lender verifies the invoice(s)

    4. The lender pays you the agreed advance, which can be up to 100% of the value of the invoice

    5. Your client pays the invoice by the agreed payment date

    6. You pay back the lender, along with an agreed fee

Fees can vary by lender, so it’s worth shopping around. Remember, you don’t need to submit all your invoices to the lender. Calculate how much money you need to raise to cover any gaps in – or stabilise – your cash flow and submit invoices worth this amount. This way, you can save yourself money on fees and charges.

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