Selective Invoice Finance – what you need to know.
How does Selective Invoice Finance work? It’s a question we are often asked, so here’s our comprehensive guide.
Selective Invoice Finance is still a relatively new comer to the commercial finance world, and the product has evolved a lot over the last few years. There are now a few different ways that companies operate their Selective Invoice Finance products, but before we get into that, let’s cover the basics.
What is Selective Invoice Finance?
Quite simply, rather than financing your entire sales ledger, as you would with factoring or invoice discounting, you pick and choose the invoices you want to finance. This could be all the invoices to one particular debtor, or simply financing an invoice every now and again. This could be weekly, monthly, quarterly to pay a VAT bill, or seasonally when your cash flow becomes stretched. It’s entirely up to you.
So how does Selective Invoice Finance work?
Now you know what Selective Invoice Finance is, how does Selective Invoice Finance work?
Traditionally, the invoice finance company will take an assignment to the invoice you want to factor. This means they own the debt, and that your customer will pay the invoice to them. They would normally also speak to your customer prior to advancing cash, with funds only being sent to you once they have confirmation that the invoice is valid and will be paid to the finance company.
Normally they would advance around 80% of the invoice value, but this could be more or less, depending on how your facility is structured and your requirement. The remaining 20% is then paid to you once the invoice has been paid to the finance company, less their fees (normally a daily rate). Obviously this means that your customer knows you are using a selective invoice finance facility, so it is always best to speak to your customer about this first.
Depending on their internal systems, they may need to set the finance company up as a payee on their system, and so will need certain information from them. It is better to deal with this at the early stages, rather than at the last minute which could result in delays. Although this may feel like a disadvantage, it does also allow a finance company to finance invoices or sectors (such as construction) which they would otherwise be unwilling to service. Because they have more control, they can look at more complex cases.
Increasingly, newer invoice finance companies are coming along who operate in a different way. Some of them will effectively provide a loan against an invoice, and will take repayment of the loan by direct debit after an agreed amount of time. The invoice is paid into your bank account as normal, so your customer will have no awareness of you using a finance facility.
However, as the repayment is made after a set amount of time, it does also mean that you could end up repaying the advance before the invoice has been repaid to you, and therefore effect cash flow. You need to be aware of this, and keep of top of your credit control. If it look’s like the invoice is going to be paid late, you must seek a payment extension to avoid potential issues.
How does Selective Invoice Finance work in terms of security required?
The short answer is that it depends on the finance company. If they are working in the more traditional way, the bulk of their security will be in an assignment to the invoice(s) being funded. Typically, these companies will also need a personal guarantee. This personal guarantee is really to ensure that if payment is not made by your customer for any reason, then you will work with the finance company to make sure they are repaid over an agreed period of time.
Typically, debentures are not required which makes it very easy to sit a selective invoice finance facility alongside other lending. A waiver may be required if there is a debenture in place, but your finance company should discuss this with you in the early stages.
Increasingly, we are finding selective invoice finance companies do not take any security, but are instead offering credit limits based on your balance sheet. However, if you do not have a strong balance sheet which can support the credit limit you need, you may need to speak to a different lender who will need security, but will allow you to access the funds you need.
How does selective invoice finance work when it comes to tying me into a contract?
Typically, no. Selective Invoice Finance facilities normally operate on an open ended basis. You are free to use the facility as little or as often as you want, and if you don’t want to use the facility any more, simply don’t put in a request for funds or upload an invoice.
How does Selective Invoice Finance work in terms of cost?
The pricing structure will often differ depending on the lender, but will always be broken down for you before you enter intro an agreement. Typically, a lender will charge a daily rate or fee against the advanced amount. They may have a minimum fee in place. The headline rates will often look more expensive than a factoring or invoicing discounting facility, but because you are not financing your entire ledger, the benefits will often make a higher rate worth it.
Is Selective Invoice Finance regulated?
No. Invoice finance in general is an unregulated products. Many invoice finance providers are members of professional bodies such as NACFB and will conform to their codes of conduct. If you are worried about any finance company, then speak to your broker to raise your concerns. They will be able to give you an honest opinion about that lender.
Who can use Selective Invoice Finance?
As long as you are a business trading on credit terms, and invoicing for completed works or services rendered, then selective invoice finance can be a great option for you. It’s a product that can be used by new start-ups and long established businesses alike.
How does Selective Invoice Finance work – further reading.
If having read this you are still wondering “How does Selective Invoice Finance work?”, or you want to find out more about which Selective Invoice Finance company is the right one for your business, get in touch today.