What is Selective Invoice Financing?

Selective invoice financing allows businesses to unlock the cash tied up in specific unpaid customer invoices before they fall due. Rather than factoring your entire sales ledger, you can select individual invoices to finance as needed to improve cash flow. One of the key advantages of selective invoice financing is that it provides businesses with flexibility and control over which invoices they choose to finance. This targeted approach releases working capital from key invoices, allowing businesses to bridge cash gaps, fund growth, and smooth out cash flow fluctuations.

How does invoice financing work? 

Invoice financing, also known as factoring, allows businesses to access up to 90% of the unpaid invoice value immediately. This accelerates cash flow and provides working capital through an invoice finance facility. Typically, you would assign your whole sales ledger to the invoice finance provider. As you raise invoices, the provider advances your money against them, depositing funds directly into your bank account and often integrating with your accounting software for seamless processing. 

When customers pay, the provider collects the payments using systems that often link back to your accounting software. Fees are charged on the funds advanced. Invoice financing is a way for businesses to leverage their unpaid invoices to get immediate funding. By essentially selling their unpaid invoices to a financing provider, companies can generate cash flow quickly to reinvest in operations and growth.

What are the common types of invoice financing?

There are three main forms of invoice finance, each designed to support different aspects of business finances:

1. Bulk invoice discounting. Funding against all invoices in your sales ledger, typically a set percentage of the invoice values.
2. Selective invoice discounting. Funding against certain invoices you select, with a specific percentage of the invoice value provided as an advance.
3. Single invoice discounting. Funding against individual invoices.

Bulk invoice finance gives you cash flow against all sales. But invoice discounting and spot factoring (single invoice discounting) allow more control. The main categories of invoice financing provide a range of options to meet different business needs. Full invoice factoring makes sense for ongoing working capital needs by advancing money against the full sales ledger. Selective and spot factoring allow more flexibility to fund specific invoices.

Explaining selective invoice finance, single & spot financing

With selective invoice finance, you can choose specific invoices to discount rather than your whole sales ledger. This method is designed to work on an invoice-by-invoice basis, offering you flexibility and control. The provider will advance an agreed percentage of the value of those invoices you select, using an invoice finance facility tailored to your needs. Single or spot invoice finance works similarly but focuses on one invoice at a time. When using a single invoice finance facility, you only select one invoice to fund. This offers maximum flexibility but involves more admin than factoring multiple invoices together. 

Selective and spot factoring are useful for managing cash flow around key sales or problem invoices. You get funding for what you need rather than relying on a general facility. Selective invoice finance gives companies control over which specific invoices they choose to finance. This targeted approach allows businesses to unlock cash from their largest or most urgent invoices. In contrast, single invoice factoring involves financing one invoice at a time on a spot basis.

What is the difference between selective invoice financing and full invoice financing?

The main difference is:

• Full invoice finance – Funding against all your accounts receivable. Ongoing service.
• Selective invoice finance – Funding against certain invoices you choose. One-off funding.

With full invoice finance, you assign your whole sales ledger to the provider. This offers reliable, ongoing cash flow but less control over which invoices are funded. Selective invoice finance allows you to access funding on-demand for specific invoices. This gives you more flexibility but involves a more administrative process of selecting invoices. The core difference between full and selective invoice factoring is the extent of your sales ledger you assign for funding. Full factoring engages the entire unpaid invoices for reliable cash flow while selective targets specific invoices flexibly.

Selective invoice finance examples

Selective invoice financing helps in situations like:

• Funding a large, key invoice. Unlocking the cash to fulfill the order while leaving your other invoices unaffected.
• Bridging through seasonal sales fluctuations. Covering cash gaps between peak seasons without the need for a lengthy contract.
• Managing issues with slow payers. Getting paid quickly on problem accounts without being tied to whole ledger facilities.
• Handling growth periods. Funding sales without ongoing factoring commitment, effectively working on a pay-as-you-go basis.
• Paying time-sensitive bills. A flexible solution for accessing cash quickly before due dates by financing a significant part of the total invoice.

Each of these scenarios demonstrates how selective invoice finance work can be advantageous, allowing businesses to address specific financial needs without committing their entire sales ledger.

By choosing which invoices to finance at any time, selective factoring provides flexibility to address financial needs as they arise. Selective invoice factoring shines for targeted situations where a business needs to fund a specific invoice or gap between major client payments. Rather than sell the entire sales ledger, companies can finance key invoices to manage seasonal dips, growth spurts, or problem customers.

Who can apply for spot invoice financing? 

Invoice financing is available for most limited companies that meet certain qualifications. It’s a popular option for businesses that might not find suitable solutions in traditional commercial banking products. To see if your business qualifies for spot invoice financing, you should consider the following criteria:

• Trading for at least 12 months, demonstrating a solid trading history.
• Annual minimum turnover over EUR 100,000 (depends on provider’s conditions).
• Making trade sales on credit terms.
• Selling to creditworthy customers, sometimes determined through credit checks.

As an alternative lender, providers can finance newer businesses and smaller invoices than banks. Personal and company credit scores are not typically barriers. To qualify for single invoice finance, businesses need to meet basic requirements around time trading, revenue, sales terms, and the credit profile of their customers. While criteria exist, alternative lenders are often more flexible than traditional banks in who they will finance.

How do I know if I’m eligible for selective invoice finance?

You can likely qualify if your business uses accounting software to manage its financials and meets the following criteria:

• Is a registered limited company. Partnerships may be considered.
• Has been trading for 12 months or more.
• Has at least 3 business customers.
• Issues business-to-business commercial invoices with 30-60 day terms.
• Has at least EUR 10,000 in outstanding invoices, as recorded in your accounting software.
• Sells products or services other businesses need.
• Has not entered administration or is not in liquidation.

Talk to a provider to discuss your specific eligibility. Requirements are flexible for the right clients. The core criteria lenders use to assess eligibility for selective invoice finance include time trading, customer base, invoice terms, outstanding payments, sector, and financial status. Many lenders are flexible if you fall short on one or two criteria but meet most requirements.

What are the risks of selective invoice financing? 

The main risks of invoice financing include:

1. The provider collects invoice customer payments. This outsourcing of credit control could damage relationships.
2. There is potential for a very high effective interest rate if you repay late or extend facilities.
3. It can be an expensive way to fund your business if used long term versus improving sales or collecting faster.
4. In recourse factoring, you remain liable if customers do not pay.
5. Reputable providers should offer bad debt protection to cover non-payment and be transparent about any hidden fees.
6. Relying on financing versus traditional lending can restrict your options if access to funding suddenly disappears.

Selective invoice finance does come with some drawbacks businesses should consider. These include outsourcing collections, which might affect your credit control processes, high costs if misused, and the risk of non-payment under recourse terms. Weighing these cons against the cash flow benefit helps determine if it is the right solution.

How can I reduce the risk of customers paying late?

To ensure customers pay on time and to mitigate the risk of late payment:

• Maintain strong relationships and communications about upcoming payments.
• Make sure invoicing and paperwork is 100% accurate.
• Highlight payment terms upfront in contracts, avoiding any ambiguities that might lead to long-term contracts unexpectedly.
• Offer easy payment methods – direct debits, cards, and bank transfers.
• Send automated invoice reminders as invoices fall due.
• Offer early payment discounts for paying ahead of terms.
• Notify immediately of any disputes to resolve.

Even when using selective invoice financing, adopting a pay-as-you-go approach in managing your receivables can be effective. This strategy allows businesses to adapt their credit control processes according to their immediate financial needs and customer payment behaviors.

What if a customer doesn’t pay at all?

If a customer fails to pay an invoice factored through a spot factoring company:

• Good providers will cover any bad debts under their protection policy. This makes selective factoring low risk.
• You may have to repurchase the invoice under recourse terms or repay what was advanced if the customer pays late or not at all. If the customer eventually pays, the lender will then provide you with the remaining balance after deducting their fees.
• Ultimately it falls on you to enforce payment. Finance providers do not initiate legal action for non-payment.

To minimize bad debts, assess customer creditworthiness thoroughly before offering terms and monitor any issues closely. If a customer defaults on an invoice you financed, you might face challenges in having sufficient funds to pay bills and meet other financial obligations.

Single invoice financing, step by step:

Here is an overview of the single invoice finance process:

1. Raise an invoice to a creditworthy customer under your standard payment terms.
2. Apply for finance against this specific invoice through an invoice finance platform. Provide the invoice, customer details, and evidence of delivery.
3. The lender will instantly assess if the invoice meets its criteria, including credit scores.
4. If approved, the lender advances up to 90% of the invoice value immediately.
5. You notify the customer to pay the full invoice amount directly to the lender when due.
6. Once the customer pays, the lender deducts its fees and sends you the remaining balance.
7. Repeat this process for future invoices as needed. There are no ongoing contracts.

Financing a single invoice involves first invoicing a customer normally, then applying to discount that one invoice through a lender. Upon approval, you receive immediate funding. The customer remits payment to the lender who collects their fee and forwards the balance.

What are the upsides of selective invoice financing?

Selectively financing invoices offers these key benefits:

• Immediate access to cash tied up in unpaid sales. This improves cash flow.
• Funding to fill temporary cash shortfalls between big client payments.
• No need to factor all invoices or tie up assets as collateral.
• Retain control over your sales ledger and credit control.
• Only pay fees on the invoices you choose to finance.
• Secure funding against a risky or unknown client.
• Bridge seasonal fluctuations in sales and revenue.
• Flexibility to select the ideal invoices to finance at any time, guided by insights from your monthly statements.

Overall, selective factoring provides targeted working capital just when you need it. The advantages of selective invoice factoring include accessing cash quickly, retaining control over sales ledgers, only paying fees on financed invoices, and the flexibility to fund what you want when you want. This makes it ideal for bridging businesses’ cash flow gaps.

What are the downsides of selective invoice financing?

The potential disadvantages include:

• Administering funding on a case-by-case basis takes more time than bulk factoring.
• Paying fees on multiple single invoices can add up.
• Customers may not like paying third parties and change payment behavior.
• Recourse terms put the liability for non-payment on your business.
• Providers often have high-interest rates and monthly minimums.
• Requires upfront admin work collecting invoices and customer details.
• One-off financing is less cost-effective than an ongoing facility to spread costs.

Be strategic in choosing the right invoices to finance to maximize the cash flow benefits and minimize costs and administration. Selectively financed invoices have some drawbacks to weigh against the benefits. Mainly, the process involves more administrative work than bulk factoring. And recourse terms and monthly minimums can reduce cost efficiency.

Is selective invoice finance a good idea for me?

Selective invoice finance makes sense if: 

• You want to fund specific invoices or customers only.
• Your biggest invoices have long payment terms.
• Your cash flow fluctuates seasonally or with big projects.
• You want to outsource credit control but maintain control over which sales to fund.
• You have unpaid invoices tying up cash that prevent growth.
• You do not want to factor in or discount your whole sales ledger.

Talk to an advisor about your business needs to determine if selective or single invoice finance is your best working capital solution. Key factors that indicate selective invoice factoring could suit your business include wanting to fund targeted invoices, dealing with fluctuating cash flow, and not wanting to factor in the full sales ledger.

The key considerations of selective factoring

Some tips for success with selective invoice finance:

• Only finance invoices to proven, creditworthy customers to minimize non-payment risk.
• Select your largest and longest overdue invoices to maximize cash released.
• Avoid financing too many small invoices that could get expensive.
• Make sure your margins can support the financing and interest costs.
• Automate sending payment notifications and reminders.
• Discuss any issues early with the provider to prevent defaults.
• Review customer statements to ensure proper application of customer payments.
• Keep detailed records of invoices financed and payments received.

Strategic selection of the right invoices to finance is key to maximizing the benefits of selective factoring. Financing too many small invoices, low-margin sales, or risky customers can diminish profitability. Keeping detailed records provides transparency. 

Are there any alternatives?  

A few alternatives to explore include:

1. Asset-based lending. Secured funding against business assets and inventory.
2. Purchase order financing. Funding for fulfilling specific client orders.
3. Business loans and lines of credit. Traditional bank lending to provide working capital.
4. Customer deposits. Collecting deposits upfront before starting orders.
5. Dynamic discounting. Offering payment discounts for early remittance.
6. Invoice chasing. Diligently following up to collect overdue invoices.
7. Trade credit insurance. Covers bad debts from non-payment of invoices.

Each option has pros and cons versus selective invoice finance products. Assess your needs with an advisor to pick the best funding mix. Businesses should consider if other forms of financing like loans, inventory lending, purchase order funding, or insurance make sense versus or alongside selective invoice factoring depending on their requirements.

How Wallester can assist you

Wallester Business revolutionizes invoice management with its innovative functionality designed to streamline corporate efficiency and save valuable time. With Wallester Business, managing invoices is effortless—employees can simply take photos and upload invoices directly through the Wallester mobile app. All incoming invoices are instantly visible in your account, allowing for fast and convenient processing. For accounting purposes, invoices can be immediately exported to your financial system, ensuring seamless integration. Wallester’s platform guarantees secure storage, keeping all uploaded invoices in one safe place, eliminating the risk of missing documents. The unified system allows you to monitor invoices in real-time, providing a comprehensive view of corporate expenses. With an integrated reminder system, exporting invoices and maintaining control over company finances has never been easier.