Selective invoice finance: how to unlock working capital and ease cash flow?

Selective invoice finance is a fast and flexible funding option that addresses cash flow challenges and helps companies maintain operations and invest in growth.

In this article, we’ll discuss how selective invoice finance works, the pros and cons, and the types of companies that can benefit from this solution.

What is selective invoice finance?

Selective invoice finance, otherwise known as single invoice finance or spot factoring, is a form of commercial financing that involves choosing certain outstanding invoices to be paid in advance by a third party. This advance gives businesses instant access to capital for balancing the books or investing in key assets or operations. 

Invoice finance providers take a percentage of the invoice’s value (consisting of an interest fee on the advance and a service charge) – fees/charges vary, but the percentage taken is usually 10-20%.

Selective invoice finance appeals to businesses that experience seasonal fluctuations, which impacts cash flow, or service providers expecting a large sum of money from a client with a lengthy payment window.

Differences between selective invoice finance and traditional invoice finance

The main difference between selective invoice finance and traditional invoice finance solutions is that, with selective financing, you dictate which invoices you want covered. For example, you might raise a high-value invoice for which you don’t want to wait several months to receive payment, while other invoices are from smaller projects which won’t affect cash flow.

Selective invoice finance is a more flexible option if you only need occasional cash injections during large-scale projects or want to trial the method before committing to longer-term solutions.

Learn more about the different types of invoice finance and the advantages and disadvantages in our guide to invoice finance.

How does selective invoice finance work?

Selective invoice finance is a business finance agreement to receive advance payments for your chosen client invoices. 

Rather than a business loan that requires you to make monthly repayments, you simply give up a pre-agreed percentage of the invoice’s value to receive instant payment and, in the case of invoice factoring, have the provider chase the invoice payment in the background.

Although selective invoice finance is often referred to as spot factoring, it’s technically not interchangeable, as companies can choose selective invoice factoring and discounting solutions. With factoring, the invoice finance provider is responsible for collecting payments from your customers, while invoice discounting means you retain control of the collection process. 

How to apply for selective invoice finance?

You can apply for invoice finance online through business finance providers and certain high-street banks. Not all offer the selective format, but those that do often use a streamlined process for invoice selection/payments.

Here are the key steps involved in selective invoice finance:

• Apply online, providing your business details and financial records requested 
• Choose and give details of the invoices you want to be funded
• Go through eligibility and due diligence checks before approval confirmation
• Providers confirm the percentage of the invoice value they’ll pay upfront
• The invoice will be collected once it's due (or chased when overdue) either by your finance team* (if you choose invoice discounting) or the finance provider (if you use factoring)
• In most cases, once the client payment is received, providers will transfer you the remaining percentage, minus their fees and interest incurred 

Many selective invoice providers use cloud-based platforms to manage the service, where you upload further invoice details as and when you require more to be paid.

*In this case, while your finance team still chases and collects invoices (even after you’ve received an advance), the account in which the money will be directed is held by the invoice finance provider.

It’s important to mention that you can choose between recourse and non-recourse financing agreements. 

• Recourse financing means you assume full liability for defaults on invoices you’ve borrowed against. 
• With non-recourse financing, your invoice finance provider is liable for any losses. The added risk for the lender means this is a more expensive option, with stricter approval criteria.

Benefits of using selective invoice finance

Selective invoice finance offers a layer of flexibility to suit specific business needs, easing cash flow issues stemming from lengthy payment schedules and late invoice payments. 

Research from Time Finance revealed that 75% of UK businesses worry about cash flow as a result of overdue client invoices. And it has a knock-on effect. In a 2024 study by IFF Research, commissioned by The Department for Business and Trade (DBT), 32% of smaller businesses said they paid suppliers late due to their business customers paying late.

Here are the main benefits of using selective business finance:

• Fast access to invoice payments – getting paid the majority of an invoice’s value in advance helps to solve cash flow gaps quickly
• Unlocking working capital – it’s a quick and easy way to release cash tied up in projects and outstanding invoices
• Flexibility of use – you only need to select the invoices you need to cover
• Cost-efficiency – rather than committing to covering all outstanding invoices, taking a hit on each, you only use the solution when you need capital
• Reduced debt burden – there’s no need to incur significant debt and commit to a period of monthly repayments, as providers essentially buys your client's debt 
• No collateral required – your invoices act as the security, so you don’t need collateral to secure funding, unlike asset finance or other loan agreements

Drawbacks to Consider

The appeal of selective invoice finance is speed, flexibility and minimal commitment, but there are a few drawbacks. Firstly, funding levels are directly linked to your invoice value, so it’s a more limited finance option, while fees are often higher than with business loans and other commercial finance solutions. 

Also, if you choose invoice factoring, you need to be comfortable with a third party dealing directly with your clients, to chase invoice payments.

Selective invoice finance examples and industry use cases

Businesses with long project timelines and those heavily impacted by seasonality are prime candidates for selective invoice finance. When experiencing swings in demand and lengthy waits for client payments, cash flow issues can hinder growth and impact operations, due to a lack of working capital. 

While traditional invoice finance can ease cash flow management, selective invoice finance allows you to boost capital in key periods without a big shift in processes or long-term commitment. 

Retail and seasonal businesses 

Retail businesses experience big fluctuations in demand across the calendar. Selective invoice finance helps retailers and seasonal businesses manage cash flow and invest in inventory, marketing/advertising and staffing needs when preparing for peak periods. Unlocking funds from outstanding invoices helps maximise sales without burdening companies with debt.

Manufacturing and construction

Manufacturing and construction businesses also greatly benefit from selective invoice finance [link to the new blog]. It helps companies cover big project costs, such as acquiring materials, paying subcontractors and managing labour costs, bridges gaps in cash flow during lengthy projects and allows companies to take on new contracts.

Professional services

Consultants and professional services companies can use selective finance to cover operational costs, recruitment needs and other expenses when waiting for client invoice payments. The funds help firms maintain healthy cash flow, be more agile and operate more efficiently when balancing various projects.

Exploring selective invoice finance solution providers and software

There are numerous lenders in the UK offering invoice finance, including some high street banks, like Lloyds, and various FCA-regulated business finance providers. Spend time comparing providers and browsing review sites and lender websites, most of which have invoice finance calculators and options for instant quotes. 

Getting started is a fairly straightforward process, with many providers using automation-powered software to operate the whole process online. However, more traditional firms and banks may require you to complete applications over the phone.

Invoice finance software streamlines various steps in the process, such as:

• Assessments – although your credit score doesn't factor much in approvals, providers assess the creditworthiness of your clients
• Invoice uploads – platforms let you upload invoices to speed up payments  
• Funding – once approval and assessments are complete, funds are transferred directly to your account, usually within 24-48 hours of invoices being uploaded
• Payment collection and settlement – if you choose a factoring format, some invoice finance solutions use automation to manage payment collection and settling of remaining balances once client payments arrive

Typical costs and pricing models

The fees UK finance providers charge for selective invoice finance vary but the majority offer around 90% of the invoice’s value upfront. This is typically higher than the percentage offered when choosing non-selective invoice finance solutions.

The usual selective invoice finance model sees providers give businesses a large percentage of the invoice value in advance, with the remaining balance transferred upon receipt of the client invoice payment, minus service fees and interest accrued.

Interest fees typically range from 1-5% and management/service fees can be up to 3% of the invoice value – factoring services will be at the top end of this range because of the extra work involved.

When exploring prospective providers, look out for set-up fees that some charge, usually between £100-500. And finally,establish the thresholds for total invoice amount and annual turnover, as these eligibility factors may rule out certain providers. 

Getting a selective invoice finance quote

You can get instant quotes for selective invoice finance through many provider websites by keying in your outstanding invoices’ value and some high-level business information, such as how long you’ve been trading and average annual turnover.

Most online applications are simple to complete, taking just a few minutes, and approvals are also pretty swift, often within 24 hours, especially as your creditworthiness is not a huge factor and you don’t need to commit collateral.

So, explore various providers and gather quotes to compare their fees, rates, track records and ease of process.

Learn more about invoice finance on our dedicated page.

Alternatives to selective invoice finance

While selective invoice finance is a useful, streamlined funding option, there are other good business finance solutions for UK companies. From lines of credit and merchant cash advances to small business loans and equipment finance.

Also, these alternative funding solutions can complement invoice finance, serving different needs, from unlocking working capital to investing in vital business assets. 

iwoca is a small business loans provider helping SMEs thrive, manage cash flow and invest in future growth. Our Flexi-Loan puts you in control of your financing needs. You can borrow £1,000-£1,000,000 with terms ranging from a day to 5 years. 

Enjoy fast access to finance, get approved in under 24 hours and receive funds within hours of approval. Plus, there are no charges for early repayments and you only pay interest on the funds you use.