Advance of up to 95% of the value of your invoice (usually a large invoice with a value more than £25,000)
Depends on the product and on your payment terms (e.g. 30, 60, 90 or 120 days)
A monthly rate of 0.5-5% of the invoice value (rate will vary according to the lender, your business profile and the length of the factoring period) plus set-up fee – factoring is usually more expensive on a per invoice basis than whole ledger facilities.
From 24 hours to 2 weeks
To finance specific (large) invoices rather than your entire sales ledger (in order to ease cash flow and to minimise late payment and debt) – and to hand over credit control to your lender
A broad range of businesses with B2B invoices (e.g. seasonal businesses, those with occasional large projects and those with just a few debtors) – lenders require a minimum trading history and minimum turnover
Spot factoring is a type of selective invoice finance, i.e. a way of borrowing money using your unpaid invoices. It’s similar to selective invoice discounting in that it allows you to finance specific invoices (or customers). The lender will take over credit control for your selected customers.
Spot factoring, like selective invoice discounting, allows you to unlock finance by selling specific unpaid invoices at a discount to a lender in return for a cash advance. You’re not handing your entire sales ledger over to a lender, as you would be with normal factoring or invoice discounting.
Spot factoring allows you to borrow money against specific unpaid invoices rather than your sales ledger, so it’s also suitable for companies with at least a few large customers. The main difference with selective invoice discounting is that spot factoring is disclosed. You hand over control of the invoices you choose to finance to the lender who collects payment from your customer and forwards your company the balance less its fee. Spot factoring may suit SMEs that don’t have the resources to chase outstanding payments and are happy to let a lender take the responsibility on their behalf.
This can be useful if you take large orders from one customer, but your other invoices are smaller or irregular. By using selective invoice finance you can get advances for your large invoices, leaving the smaller ones unaffected.
As with normal factoring, spot factoring is ‘disclosed’ – after all they will be paying back your factoring provider, not you.
You hand over credit control for the specific invoices you’ve chosen to finance to your finance provider. If you’d rather keep it in-house then you could consider selective invoice discounting. There’s also other types of confidential invoice finance.
As with all types of invoice financing, your cash advance is a percentage of each invoice’s value. Once your customer has paid an invoice, the lender pays you the remaining balance minus their fee.
With spot factoring and selective invoice discounting, the individual invoices you choose to finance don’t have to be from the same customer – you decide which ones you finance and which ones you choose to handle yourself.
Invoice discounting is the simplest type of invoice finance. It involves a lender advancing you money against unpaid invoices and charging a fee based on the value. This form of finance is suitable for bigger companies with a relatively high turnover as it allows them to secure funding against their entire sales ledger.
Invoice discounting is confidential, so your customers don’t know you’re using their invoice as collateral. Your company remains in charge of its own credit collection. It’s also considered riskier so your lender may require evidence that your customers pay promptly and you have in-house capacity to chase outstanding payments.
Invoice factoring also lets bigger companies borrow money against their sales ledger, but it’s different to invoice discounting because the process is disclosed. The lender takes control of your credit collection and deals directly with your customers. They pay the lender, who then forwards you the balance less their fee.
Invoice finance can benefit smaller businesses as it means they don’t have to chase their outstanding payments, although they have to prove to the lender they generate a reliable turnover. However, it may not be cost-effective for SMEs with fluctuating cash flows.
Selective invoice financing
Selective invoice financing lets your company borrow against specific invoices, rather than your entire sales ledger. This form of invoice finance is suitable if your company generates a significant proportion of its income from large, steady customers, and you only want to finance those invoices. Selective invoice financing can also help SMEs raise working capital if they have fluctuating cash flows, as borrowing against their sales ledger may not be cost-effective.
Selective invoice financing comes in two forms: selective invoice discounting and spot factoring.
Selective invoice discounting
Selective invoice discounting works in the same way as invoice discounting, where a lender advances you money against outstanding invoices. The main difference is you choose the invoices you’d like to finance rather than your company’s whole sales ledger. As such, it’s useful for companies seeking to borrow against invoices issued to a few big customers instead of a lot of smaller customers.
Selective invoice discounting is also similar to regular invoice discounting because it’s confidential, so it could be the right option if your company would prefer to hide from your customers that you’re securing finance against their invoices.
Confidential invoice finance
Confidential invoice finance is a suitable funding option if you prefer your customers to remain unaware that you’re securing finance against their invoices.
Confidential invoice finance refers to forms of invoice finance that aren’t disclosed to your customers. We’ve already described invoice discounting, but confidential invoice factoring and CHOCs (Customer Handles Own Collections) are other examples of this type of finance.
CHOCs (Customer Handles Own Collections)
CHOCs, short for Customer Handles Own Collections, is a cross between invoice discounting and invoice factoring. As with invoice discounting, you deal directly with your own customers. However, like invoice factoring, your customers pay the lender instead of your company, so they know you’re using their invoices to secure working capital.
CHOCs are suitable if you’d like to maintain a direct relationship with your client or for early-stage companies that don’t qualify for invoice discounting, as long as they can prove they have the in-house capacity to chase outstanding payments. They can also offer a more cost-effective option for companies with lots of small customers.
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