UK factoring and invoice finance – the differences between spot and selective factoring - Image

UK factoring and invoice finance – the differences between spot and selective factoring

The popularity of invoice finance and asset based lending in the UK showed no signs of diminishing in early 2018, with over 40,000 companies estimated by UK Finance to have used an invoice finance and asset based lending arrangement at the end of March 2018.

However, those firms who’ve yet to explore this cashflow support mechanism mightn’t realise that invoice finance encompasses a wide range of products which can be suitable for companies of different sizes, commercial situations or those with specific future objectives.

This week we’re looking at the contrasting features and benefits of two specific invoice finance products: one known as selective factoring, the other as spot factoring.

Selective factoring                                                

What is it?

In a basic factoring facility, the financier will provide their client with a funding advance based on all of the invoices in their sales ledger, but as its name suggests, selective factoring works slightly differently – here businesses can choose which customers from their sales ledger to factor. Of the customers chosen, the client can also choose which invoices to gain an advance on. The features of credit control being looked after and the disclosed nature of the arrangement remain as with invoice factoring.

The benefits

  • Fast, flexible funding – as with most factoring facilities, selective factoring financiers could potentially transfer the agreed percentage of your invoice’s value within as little as 24 hours. Combine this with the ability to select which customers’ invoices you’ll receive funding for and the product fast becomes invaluable, allowing you to counteract cashflow issues caused when specific customers take anywhere between 30 to 120 days before submitting payments.
  • Preserve customer relationships – you’ll avoid the need to alert everyone on your firm’s sales ledger to the arrangement’s existence, therefore any customers with whom your dynamics might shift if a financier entered the fray can simply be omitted from your selective factoring agreement.
  • Customer creditworthiness – financiers will usually prefer for businesses looking for factoring to select those customers with high credit scores for their own security. As such, if you’re aware of your clients’ respective ratings, then now’s the perfect time to take advantage of this knowledge and unlock funding from the most creditworthy candidates’ invoices.
  • No Minimum Fees – by only factoring specific customer invoices to gain finance on, the minimum fees structure, which whole ledger facilities have, are not usually applied. Making it ideal for small businesses or those who want to avoid minimum fees.

Case scenarios

  • Firms operating in late payment-ridden industries looking to reduce the need for / risk of waiting 30-120 days before receiving funding from their less-prompt customers should consider selective factoring. Businesses in construction and manufacturing for example tend to use factoring.
  • The benefits of this facility extend to any involved with public / government contracts; the general creditworthiness of the organisations involved with these projects will make them especially attractive to selective factoring financiers and thus greatly enhance your chances of securing such an arrangement.
  • Alternatively if you’re looking to fund a short- or long-term project – such as a recruitment campaign – and know the rough costs involved, then selective factoring would allow your firm to receive funding from those larger customers whose invoices equate to the projected expenditure.

Spot factoring

What is it?

If selective factoring enables firms to hone in on specific customers’ invoices, then spot factoring takes this decision-making ability one step further. In this case you’ll select individual invoices from your sales ledger – belonging to one or multiple customers of yours  – and receive a funding advance based on these invoice values alone.

The benefits

  • Focused flexible funding – compared to other invoice financing arrangements, spot factoring provides businesses with the most choice to precisely target which invoices to gain an advance on – ideal if you need to unlock a specific amount of funding to invest in a new equipment purchase or project in the next quarter.
  • No Contract Tie-Ins – unlike full ledger factoring facilities, there is no contractual commitment to use the factoring service long term.
  • A solution to seasonal business – related to the first aforementioned benefit, choosing spot factoring could be a major benefit if you operate a business which experiences seasonal demand as you can plan accordingly to sustain/ enrich your business without the increased commitment you’ll be obliged to fulfil from a whole ledger facility.
  • Take Advantage of customer creditworthiness – as with selective factoring, spot factoring financiers will primarily provide advance funding on invoices from creditworthy customers, making the latter product just as appealing for businesses whose partners boast strong credit scores.

Case scenarios

  • Wholesale and retail companies who’re looking to strengthen their working capital amidst seasonal hikes in demand (e.g. Christmas or Summer Sales) could access the requisite funding by focusing on specific high-value invoices in these periods.
  • Again if your business is currently working on public sector projects with government / civil service bodies, then spot factoring financiers will view this as a more attractive starting point for your arrangement than contracts involving customers with low / average credit scores.
  • Businesses which frequently raise multiple invoices to certain customers may only wish to receive advance funding on the most valuable invoices; since spot factoring financiers tend to favour these invoices as well, both parties will come away satisfied.

Access UK factoring and invoice finance with Touch Financial

Now that we’ve explored the distinguishing traits of spot and selective factoring, hopefully you’ll have a better understanding of how either product could be used to benefit your business’ commercial situation. Get in touch today and one of our consultants will be more than happy to help illustrate if factoring could work with your business and if so which financers would be most suitable for you.

Apply now and one of our consultants will help to find you the best invoice finance facility for your business, free of charge.

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