Invoice finance has long been a popular option for company directors seeking a monthly injection of cash that eases the strain on existing working capital. Invoice factoring and discounting are similar procedures that result in an advance payment being made on your issued invoices.
Depending on how your business operates, however, it may not be cost-effective to sell your entire sales ledger to a factoring or discounting company. There is likely to be little value for businesses relying on seasonal trade to operate in this way, nor for those with only one or two significant customers.
This is where two relatively unknown alternatives called selective invoice factoring and selective invoice discounting may be more appropriate. They allow for specific invoices to be chosen and ‘sold’ to a specialist lender, offering a far more cost-effective solution for your company.
Single invoice factoring gives you access to around 80% to 90% of each debtor invoice selected. There is no need to wait until the stated remittance period has expired - the lender pays you the agreed percentage, generally within 48 hours of issue, the remaining balance less fees being paid when your customer meets the invoice in full.
No further commitment is required from your company. The absence of a long-term contract means that this option can be taken up whenever cash is needed.
A similar process ensues when selective single invoice discounting is used, the only difference being that discounting offers confidentiality as you retain control of the collection process. Customers send payment to your company as normal, whereas invoice factoring involves them paying the lender.
A downside of this type of finance is the high percentage interest charged by lenders, but you may be interested to know about a relatively new option that can address this problem.
The combination of crowdfunding and selective invoice factoring offers directors the opportunity to pay a lower fee on the amount of the chosen invoice. Small single invoices can also be bundled together to meet the minimum amount required by the crowdfunding network.
Any bundled invoices must be for a single customer, and are placed as one total into an auction. The preferred terms are set by you as the seller, including the duration of the auction, percentage of the invoice to be sold and the desired interest rate.
The benefits are similar to standard invoice factoring where a lender pays your outstanding invoice value giving you an immediate cash flow boost, and then chases up payment with your customer after you have been paid. However, this process is traditionally carried out over all sales invoices with no specific instruction to focus on a particular invoice.
If your business is experiencing cash flow concerns and has a large single debtor, selective invoice factoring could be an ideal short-term funding option. There are typically no arrangement fees, no monthly fees and no minimum contract term – it is flexible and risk-free because from a lender’s perspective, they can already see that the money is due. We have an extensive network of 55 offices offering confidential director support across the UK.
For more information on selective invoice finance, contact our experienced finance team at Real Business Rescue who can help source the finance that your business needs through our relationships with over fifty lenders across the UK.
Author: Keith Tully (Partner)
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