Selective invoice discounting, also called single invoice discounting, gives businesses much more flexibility by allowing them to choose which invoices they raise finance against depending on their needs.
That means businesses can ‘sell’ a single or batch of invoices whenever they need to boost their working capital. This is also much cheaper than raising finance against every invoice.
Typically, an invoice discounting agreement involves the whole sales ledger. That means every invoice a business issues is effectively sold to a finance provider at a discounted rate. The finance provider then pays an advance that can be up to 100% of the invoice’s value.
How Does Selective Invoice Discounting Work?
Selective invoice discounting works in much the same way as spot factoring:
- The first step is to agree to terms and fees with an invoice discount provider;
- The business then issues an invoice to a customer it wants to raise finance against;
- It also sends a copy of the invoice to the invoice discounting provider;
- The financier verifies the invoice and pays you a percentage of the invoice’s value up front;
- You collect the payment from the customer when it is due;
- You receive the balance of the invoice, minus the finance provider’s fee.
When Might Selective Invoice Discounting be Used?
In a selective invoice discounting agreement, the finance provider’s risk depends more on the creditworthiness of your customers than it does on the health of your business. That means it’s typically a product used by established businesses selling to larger customers.
For example, if your business has a healthy turnover, some years of trading history and regularly invoices multinationals, selective invoice discounting could be a viable option. On the other hand, if your business is a start-up that trades primarily with other SMEs, spot factoring will be a more suitable choice.
With a selective invoice discounting facility, as you’re raising finance against individual invoices, it’s also common for you to receive a greater advance than in a whole ledger agreement. In fact, it’s not uncommon for businesses to receive 100 percent of the invoice’s value upfront and then pay the lender’s fee.
That makes selective invoice discounting a useful option for businesses that:
- Have unpredictable cash-flow cycles;
- Have irregular sales or are affected by seasonality;
- Want to take advantage of new business opportunities;
- Need to pay the expenses associated with rapid growth;
- Need to bridge the cash-flow gaps resulting from late customer payments.
What are the Advantages of Selective Invoice Discounting?
- There are no lengthy contracts with this type of facility;
- The business incurs no additional debt;
- It can be used in conjunction with other types of finance;
- No business or personal assets, apart from the invoice, are required as security;
- You can use it as and when you want;
- You can raise cash-flow quickly;
- It’s a one-off transaction, so there are no monthly fees to pay;
- It converts accounts receivable into cash, which can make your balance sheet more attractive to investors.
What are the Disadvantages of Selective invoice discounting?
- A selective invoice discounting facility can take some weeks to set up;
- It’s difficult for smaller businesses to access;
- You will need an established credit control process to be accepted by a finance provider;
- Finance providers will only advance against commercial invoices.
For established businesses with a small number of large customers and irregular sales, selective invoice discounting can be a fast and effective way to access the cash they need. There’s also no debt incurred and no security required, which makes it an attractive and relatively safe option.