Selective Invoice Finance: How One Invoice Is Funded

A whole-ledger facility is built for a business whose sales are steady and spread across many customers. Many businesses do not look like that. A manufacturer that has won its first order from a national retailer on long terms, a wholesaler with a peak twice a year, a business that needs cash once for a single large job: each needs funding against a few invoices, not a standing facility with minimum fees and monthly reporting. Selective finance fills that gap, usually without a long minimum term.

The cost of the flexibility is concentration. The financier is relying on one debtor and one document at a time, with no pool to average the risk, so it prices each invoice on its own and does most of its credit work on the customer rather than on the business that raised the invoice.

The business submits the invoice with evidence of delivery. The financier checks the debtor's credit, confirms with the debtor that the invoice is genuine, undisputed and payable on its terms, and takes an assignment of that receivable. In many selective products the debtor is told and asked to pay the financier directly. The financier advances part of the face value, keeps its charges when the debtor pays, and returns the rest. If the debtor does not pay, the agreement decides who bears it: with recourse, the business buys the invoice back; without it, the financier bears the debtor's insolvency, though usually not a dispute about the goods.

Two legal points sit under the assignment. The first is whether the customer's contract forbids it. In the UK, a term in a contract governed by the law of England and Wales or of Northern Ireland and made on or after 31 December 2018 that prohibits or restricts assigning a receivable generally has no effect, unless the supplier is a large enterprise or special purpose vehicle or the contract is of an excluded kind; the rule does not reach contracts governed by Scots law. In Australia, the personal property securities legislation limits such terms for many receivables, with exceptions. Outside those rules the financier reads the customer's terms before it funds. The second is priority. In Australia and New Zealand, a transfer of a receivable is itself a security interest under the same legislation, so the financier registers it. In all three markets the financier usually asks the business's existing lender, whose all-assets security commonly covers receivables, to release the invoice or agree that the financier ranks first.

A cabinet maker, constructed for this page, wins its first order from a national home-improvement chain: US$360,000 of units, delivered and invoiced in March, payable in 75 days. Its overdraft cannot carry the materials and wages for the order on top of its normal trade, so it puts the one invoice to a selective financier. Before funding, the financier asks the cabinet maker's bank to release that invoice from its security, which the bank does, since the advance funds the order and the remainder will come back to the business's account. The rates are the example's:

On day 60 the chain reports eight units damaged in transit and takes a US$24,000 deduction, paying US$336,000 on day 75. The financier is still covered, so the whole deduction comes out of what the cabinet maker gets back:

The business receives US$24,000 less than it planned and keeps the argument with the chain about the damaged units. Had the deduction been larger than the US$43,320 margin, the agreement, which is with recourse, would have required the cabinet maker to make up the difference. A dispute is one of the ordinary ways a single invoice goes short, and selective agreements commonly leave that risk with the seller, with or without recourse.

In invoice discounting or factoring, the financier's protection is statistical: a spread of debtors, an advance rate set with the ledger's history of dilution in mind, concentration limits and monthly reporting. In selective finance it is specific: one debtor's credit, one verified invoice, one payment instruction. A selective financier can therefore fund a business it would not take on for a whole ledger, and decline an invoice from a business it likes if the debtor is weak. Pricing follows the same logic. A whole-ledger facility charges a service fee across turnover and interest on drawings; selective finance charges per invoice, which costs more per dollar funded and nothing in the months it is not used.

The other neighbour is supply chain finance, which also funds individual invoices but is arranged by the buyer for its suppliers and priced on the buyer's credit. Selective finance is arranged by the seller, invoice by invoice, and the seller usually carries the dispute risk.

DEFINED IN ONE PARAGRAPH → · INVOICE DISCOUNTING → · SUPPLY CHAIN FINANCE →

For the business's bank, a selective facility reaches the file in two ways. As a request: the customer asks for an invoice to be released from the bank's security, and the credit officer weighs whether the money will fund the order and come back, or leak to other creditors. As a signal: a customer that turns to selective finance month after month is saying its working capital facility is too small for the business it now does. That is a conversation about structure, not a release letter.

For the selective financier, the file is about the debtor: whether it exists and owes the money, whether it has a record of disputing deliveries or taking deductions, and whether the seller depends so heavily on it that one dispute would put the seller under. Customer concentration that a whole-ledger lender would cap is, here, the whole of the exposure.

PRODUCT FILE: INVOICE FINANCE → · ONE CUSTOMER MOVES TO OPEN ACCOUNT →