Invoice finance, breaks down into factoring and discounting as two main product forms, from there it can come in several sub-types, this article explores these sub-types, how they operate, the pros and cons and how differ.
Selective Invoice Discounting
A sub-form of invoice discounting is selective invoice finance, sometimes known as single invoice finance or spot factoring. This form of finance works in the same way as invoice discounting but has the added benefit of allowing the business to control which customers or invoices are discounted. Companies with selective invoice discounting in place get to choose the invoices they would like to factor, rather than committing to a contract which covers their whole sales ledger.
Selective invoice finance is often a good option for companies that have unpredictable cash flow only at certain times of the year, or have one particularly large client that can throw their cash flow off balance. While this affords companies more flexibility in their finance provision, it provides less security for the lender, which means the rates are usually higher. Lenders will also want to vet your customers more thoroughly before they agree to selective lending.
Confidential or Disclosed Invoice Discounting
Many companies opt for confidential invoice discounting, which means customers will be unaware that you are using a finance provider. This is a favourable option for most companies, as customers may mistrust third-party involvement and, in some cases, will seek services elsewhere if they are aware that your company is borrowing money.
If your invoice discounting facility is disclosed, however, your invoices will be marked with a ‘notice of assignment’, telling your customers that invoices are assigned to an invoice provider. While you will still retain control over your sales ledger and are responsible for chasing payment, your customers will pay your finance company directly. Disclosed discounting is usually more expensive than confidential discounting due to the administration fees involved. It’s worth considering which option is better for your business, if you rely on maintaining strong customer relations confidential is often preferable.
Confidential Invoice Factoring
It is possible to set up a confidential factoring facility. Not many providers offer this product as it presents more work, risk, and costs to the lender than a disclosed facility. The factor still controls your sales ledger but introduces themselves differently to your customers. Instead of using their own name, they will act as your account department, operating under your business name when dealing with your clients. Typically a dedicated phone line will be set up for customers to call and arrange payments. The lender handles the calls, but answers in your name.
