Selective invoice discounting, or single invoice discounting, is a facility that allows companies to effectively ‘sell’ individual invoices to a finance provider at a discount to raise working capital.
The result is a simple, flexible solution that can be used to solve cash flow problems and fuel growth on an invoice-by-invoice basis.
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How Does it Work?
The process itself is quick and simple:
- You decide when you want to release the capital from an invoice;
- You send a copy of the invoice to the invoice discounting provider;
- They approve the invoice and quote you a single fee as a percentage of the total invoice;
- You receive an advance payment of up to 95 percent of the invoice’s value within as little as 24 hours in some cases;
- You receive the balance when the customer pays the invoice, minus the finance provider’s fee.
Selective Invoice Discounting Vs. Spot Factoring
Both discounting and factoring are forms of invoice finance. The key difference is that with factoring the finance provider takes control of the sales ledger, whereas with discounting the business retains control, meaning clients need not be alerted.
Selective invoice discounting and spot factoring both refer to the use of invoice finance for a single invoice. They largely differ surrounding who collects the money from the client.
Is Selective Invoice Discounting Suitable for you?
Invoice discounting and factoring facilities are typically applied to the entire sales ledger. However, this can become expensive as companies are consistently missing out on a percentage of their income. In this case, invoice finance may not be the cost effective solution to a cash flow problem. However, for many businesses with seasonal fluctuations or just one customer, selective invoice discounting is an affordable and effective solution.
Selective discounting is well suited to:
- Businesses that make business-to-business (B2B) or business-to-government (B2G) transactions;
- Seasonal businesses with inconsistent cash flow requirements;
- Businesses that trade mainly with one customer;
- Businesses that don’t want to commit to a long-term finance contract;
- Businesses that need a one-off cash flow injection to invest in a new project, stock or equipment;
- Businesses that are experiencing a temporary cash flow shortfall;
- Businesses that want to take advantage of early payment discounts from suppliers.
What are the Advantages of Single Invoice Discounting?
For a one-off fee, selective invoice discounting allows you to unlock the funds tied up in an unpaid invoice without having to wait for 30, 60 or even 90 days for the customer to pay. The other advantages include:
- You keep control of your sales ledger and maintain your client relationships – there is no need for your customers to know about the presence of a finance provider;
- Money can be raised extremely quickly;
- A business can enjoy financial flexibility that allows it to expand and invest in other projects;
- There are no long- term contracts or ongoing fees;
- There are no ‘break fees’ if you choose to leave a selective invoice discounting agreement;
- It can be used as little or as often as you need;
- You maintain complete control of your accounts receivable.
Discounting is a Cash Flow Solution for Established Businesses
Selective invoice discounting is best suited to established businesses that trade with creditworthy customers. This is because the provider’s risk depends on your customers rather than your business.
Therefore, the finance provider will want to see that you have a satisfactory credit control and collections process in place and a track record of being paid by customers on time. So, if your business has a healthy turnover, at least one year of trading history and sells to government agencies or large businesses, selective invoice discounting could be a viable solution.
On the other hand, if you are a startup business trading with SMEs, invoice factoring or spot factoring is likely to be a more suitable option for you.