Business Finance Series – What is Invoice Finance? – Part 7

This week, I finish my series of blogs looking at invoice finance.

As I’ve explained in previous weeks, there are a variety of different options available when it comes to invoice finance. They all work in different ways and have different qualifying criteria, but essentially the main types of invoice finance are as follows:

• Factoring
• Spot factoring
• Confidential invoice discounting
• Selective invoice discounting

This week, we finish the series by taking a look at selective invoice discounting. So here goes!

Selective Invoice Discounting

Firstly, what is selective invoice discounting? Perhaps the simplest way to describe it, is as a cross between confidential invoice discounting and spot factoring.

As I’ve explained over the last two blog articles, confidential invoice discounting is a rolling contract, with the lender securing their advance against your entire sales ledger.

And in many ways, selective invoice discounting is very similar to confidential invoice discounting.

So, like confidential invoice discounting, selective invoice discounting is confidential, it requires you to demonstrate that you have the in-house capabilities to manage the credit control function within your business, you can raise up to 95% of the value of invoices and it is ideal for companies who provide their customers with credit terms of up to 90 days.

However, with selective invoice discounting there is one crucial difference.

With selective invoice discounting you don’t take out finance against all the invoices within your sales ledger.

Instead, like spot factoring as described in an earlier blog, you borrow funds on an invoice-by-invoice basis.

Selective invoice discounting may be a good fit for your business if:

• You can demonstrate the ability to manage your sales ledger in-house
• You operate in the business-to-business (B2B) sector
• You trade with a smaller number of customers
• You don’t want to commit to a long-term, ongoing finance contract
• You have a minimum turnover of £100,000 per annum
• You don’t have ongoing working capital requirements but rather occasional or temporary cash flow requirements

As I say, the principle of selective invoice discounting is that funds can be raised quickly, on an invoice-by-invoice basis. And you don’t have a long-term contract or ongoing fees and can use the facility as often or as little as you like.

The main difference when compared with spot factoring, is that selective invoice discounting is confidential, and you retain complete control of your sales ledger.

Please note that when applying for selective invoice discounting, it is not necessarily easier to obtain than normal confidential invoice discounting. You will still need to demonstrate you run an established and well-managed company and that you have an effective in-house credit control function.

In summary, the advantages of a selective invoice discounting facility would be as follows:

• It is confidential
• You keep control of your sales ledger
• For a one-off fee you can unlock funds tied up in an invoice without having to wait 30, 60 or even 90 days to get paid
• Funds can be raised quickly
• There is no long-term contract and no ongoing fees
• There are no “break fees” if you decide to stop using the facility and leave the agreement
• It can be used as little or as often as you like

The disadvantages would be:

• It is not suitable for start-up businesses
• It is also not suitable for smaller companies or sole traders
• It is less beneficial if you have ongoing working capital requirements

Regarding the costs, these are very similar to the costs for confidential invoice discounting. So, expect to pay a discount fee in the range of 1% to 3% over bank base rate on the amount of funds you borrow for the period of time that you borrow it.

And the service fee you pay will be a percentage of the value of the invoice, paid on an invoice-by-invoice basis.

In summary, selective invoice discounting can be an ideal solution, if you want to keep your invoice finance confidential whilst not having to sign-up to an ongoing contract against your entire sales ledger.

As I finish this series on invoice finance, there are a couple of points worth making.

It is estimated that there are now over 100 different invoice finance schemes available from different lenders within the UK.

It is also worth noting that currently, the invoice finance industry is not regulated by the Financial Conduct Authority (FCA). With this is mind, it is important that you choose your invoice finance provider with care.

Different lenders offer different solutions, and it’s important you understand which option would work best for your business. As a result, make sure you do your research, ask questions, get comparisons and consider using an experienced broker.

There are many great finance brokers, who will offer you help and advice and give you the information you need, to make a good decision on the best finance option for you. If you’re unsure about the next step or unclear about who to use to help you arrange invoice finance, my suggestion is to contact the National Association of Commercial Finance Brokers (NACFB) who will be able to point you in the direction of one of their members.

Alternatively, if you want to talk to us about the invoice finance options that exist for your business, then email us at keith.park@fundingtrack.com or give us a call on 020 8949 2122 and let’s see how we can help.