Are you looking to free up cash that’s trapped in your sales ledger due to late payments? Many business finance options can help you get around this problem and improve your cash flow. One such option is to use selective invoice discounting. It’s a quick and low-risk way to secure funding for your business.
However, as with any other source of funding, you must know exactly what you’re signing up to before you make a decision. Read our guide below to get to grips with what it means for you and your business. By the end, you’ll have a much better understanding of whether it’s the right solution for you.
Selective invoice discounting is a way that you can borrow money against unpaid invoices in your debtor book. This lets you continue to finance your business operations while waiting for customers to pay for your services.
Invoice discounting is one of two main branches of invoice finance, the other being invoice factoring. Both methods allow you to exchange unpaid invoices for loans from third parties.
What separates invoice discounting is the party that manages the invoice payment collection. With invoice discounting, you maintain credit control and the responsibility of chasing customers for payments.
This makes it ideal if you prefer a confidential service or if you’d like to continue building relationships with your customers even after a sale. On the other hand, it means you do extra work that professionals could handle while you run your business.
Now, the difference between selective invoice discounting and the other kinds of invoice discounting lies in the number of invoices you give to the finance provider.
With full invoice discounting, you borrow money against your entire debtor book.
However, selective invoice discounting lets you select a specific set of invoices that you would like to exchange for a loan.
Single invoice discounting is often used as a synonym for selective invoice discounting. However, it is also used to refer to invoice discounting a single invoice rather than a set.
Since there’s some ambiguity around these terms, by saying selective invoice discounting we mean a method that lets you choose which invoices you want to advance – whether that’s most of them or just one.
The process of selective invoice discounting has three main stages:
· Invoice selection: You select a set of invoices that you want to assign to the discounting company and agree on terms and fees.
· Initial funding: The discounting company advances a percentage of the value of the invoices upfront, typically 70-85%.
· Final instalment: When a customer pays an invoice, you get the remainder of the invoice’s value minus the discounting company’s fee.
There isn’t a standard price when it comes to selective invoice discounting. It all depends on the discounting company you use, not to mention your business itself. For this reason, it’s a good idea to get several quotes and compare the costs involved before committing to a provider.
Even so, there are a few aspects of typical fee structures that it pays to consider.
These are also called discount rates and are usually set at 1.5-3% over the Bank of England base rate, paid for each invoice.
Discount providers will typically offer you better rates for higher value invoices, meaning that you can get a better return by selecting these.
Discount rate charges are calculated on a daily basis and applied weekly or monthly. This means that the longer a customer takes to pay an invoice, the more interest you will pay the discounting company.
Consider this when choosing which customer invoices to advance. By selecting invoices from customers that you know will pay quickly, you could save yourself some money.
This usually ranges from 0.2-0.5% of your business’ annual turnover. This is far lower than the fees of invoice factoring since you still do the work required to collect the debts yourself.
· Lower service fees: Since you chase up unpaid customer invoices yourself, the discounting company will charge you a lower fee compared to invoice factoring.
· Greater financial control: Selective invoice discounting gives you the freedom to choose which invoices you want to use and from which clients. It gives you greater control over your finances than if you used your entire debtor book, as with invoice discounting. Moreover, you maintain credit control rather than handing it off to a third party, like with invoice factoring.
· Confidentiality: Since you retain credit control, no customer will find out that you’re using selective invoice discounting unless you want them to. This helps you more easily maintain relationships, since some customers might not respond well to third-party involvement in their debts.
Sound good? Invoice finance is one of our key offerings at Nucleus. With us, you can borrow anywhere from £100K up to £50M and advance invoices up to 100% of their value. Get in touch with a member of our helpful team to find out more.
· High interest rates: Interest rates for selective invoice discounting are higher than the Bank of England base rate and may be more expensive compared to other types of business financing. Make sure to compare the costs involved before making any decisions.
· More work: Since you retain credit control, you keep the responsibility of chasing up outstanding client payments. This takes time and energy that might be better spent running your business.
· Less accessible: Invoice discounting is usually reserved for businesses with a higher annual turnover and with credit control processes that are proven to work. This means it’s usually harder for smaller businesses to secure this type of funding.
If selective invoice discounting doesn’t seem right for your business, don’t worry. There are plenty of types of business funding that may be more suitable for your needs.
Many discounting companies offer selective invoice discounting to a range of different business types, including sole traders, limited companies and limited liability partnerships. As long as you run a UK-based business that issues invoices to other UK-based businesses on payment terms, you might be eligible for selective invoice discounting.
Selective invoice discounting is most suitable for businesses with proven track records, robust credit control processes and creditworthy customers with a history of paying on time. Most discounting companies only take on businesses that meet a minimum annual turnover and have at least one year of trading history.
However, since the discounting company will be reliant on your customers for repayment, it’s more important that your customers are creditworthy than you are. This means you may be eligible even if you have had poor credit in the past; and that you can boost your chances of approval by selecting invoices from your most reputable customers.
After reading this guide, you should have greater clarity on selective invoice discounting and how it differs from other financial products. This means you’re in a better position to understand if it’s the right option for your business.
It all boils down to the cash flow problem you’re trying to solve and your ideal manner of doing that. Be sure you understand what selective invoice discounting entails and consider all the pros and cons before making any decisions.
We specialise in providing UK SMEs with funding options, helping them flourish and grow. If you’d like expert advice about selective invoice discounting or any other types of business funding, don’t hesitate to contact us.
4 August, 2022