Selective Invoice Finance Explained: How Spot Factoring Works for UK SMEs

Selective invoice finance, also called spot factoring, lets a business raise funds against single invoices or a chosen batch, rather than its whole sales ledger. There is no long-term contract or minimum service fee tied to every invoice raised, which suits businesses with occasional cash flow gaps or one large, slow-paying customer.

What selective invoice finance actually is

Selective invoice finance is a facility that funds individual invoices on a case-by-case basis, rather than requiring a business to sell its entire sales ledger to one provider. A business chooses which invoices to fund and when, typically releasing 80 to 90 percent of the invoice value within 24 to 48 hours of raising it.

This differs from a traditional facility where every invoice a business raises is automatically assigned to the provider. With selective finance, the business keeps day-to-day control of collections on invoices it has not chosen to fund, and can dip in and out of the facility as cash flow needs arise.

How it differs from whole-turnover factoring or discounting

Whole-turnover factoring or discounting funds every invoice a business issues and usually runs on a rolling contract with a minimum service charge, whereas selective finance funds only the invoices a business picks. Whole-ledger facilities give lower per-invoice pricing in exchange for that commitment.

Selective finance costs more per invoice funded because the provider takes on the same underwriting and administration work for a smaller, less predictable volume. Many providers also cap how many customers or invoices can be funded under a selective arrangement, so it tends to suit businesses funding a handful of large invoices rather than a high volume of small ones.

How the funding process works in practice

The funding process starts with the provider verifying the invoice and the underlying customer's creditworthiness, then advancing a percentage of the invoice value once the goods or services have been delivered and the invoice raised. The remaining balance, less charges, is paid when the customer settles.

Most providers use an online portal where a business uploads invoices and supporting delivery proof, and funds are typically released within one to two working days of approval. Because each invoice is assessed individually rather than under a blanket agreement, approval can take longer for a business's first few submissions until the provider builds a track record with that customer base.

Costs and charges to expect

Selective invoice finance charges a discount fee on the funded amount, usually calculated daily against the Bank of England base rate plus a margin, alongside a separate service fee per invoice funded, and both tend to run higher than whole-ledger facility rates. With base rate at 4.50 percent, discount charges on selective facilities commonly sit a few percentage points above whole-ledger equivalents.

Because there is no minimum monthly charge in most selective arrangements, a business only pays for what it uses, which can work out cheaper overall for occasional needs despite the higher per-invoice cost. It is worth asking each provider for an all-in cost example on a representative invoice before comparing quotes, since fee structures vary.

Which businesses suit spot factoring

Spot factoring suits businesses with irregular cash flow gaps, a single large contract or customer causing a temporary squeeze, or those unwilling to commit their whole ledger to one provider. It is also used by businesses testing invoice finance before deciding whether to move to a whole-turnover facility.

It is less suited to businesses needing continuous funding across a high volume of invoices, where the per-invoice cost of selective finance adds up faster than a whole-ledger facility's flatter pricing. Seasonal businesses and project-based firms, such as those in construction or events, often find selective finance a better fit than a long-term contract.

Risks and drawbacks to weigh up

The main drawbacks of selective invoice finance are higher per-invoice pricing, provider caps on how much of a ledger can be funded selectively, and the risk that a business becomes reliant on cherry-picking its best invoices while weaker ones go unfunded. Some providers also limit selective facilities to a small number of approved customers.

Businesses should also check whether the facility is disclosed or confidential, since a disclosed facility means the customer is notified that the invoice has been assigned, which some businesses prefer to avoid. Reading the contract for any hidden minimum volume requirements is essential, as some providers market a facility as selective but still expect regular usage.

How to choose a provider

Choosing a selective invoice finance provider means comparing the advance rate, discount charge, service fee per invoice, and whether the facility is confidential, alongside how quickly funds are released once an invoice is approved. Speed matters more here than in whole-ledger facilities, since selective finance is often used to plug an immediate gap.

It is worth checking whether the provider requires a minimum invoice value, since some will not fund invoices below a certain threshold, and asking for references from businesses in a similar sector. UK Finance membership and FCA-regulated status are useful checks, as not every selective finance provider is regulated in the same way as mainstream lenders.

Step by step

1. Identify the invoice or invoices causing the cash flow gap and confirm the customer has a track record of paying reliably.
2. Approach two or three selective invoice finance providers and request an all-in cost quote for a representative invoice.
3. Submit the invoice, proof of delivery or completion, and basic customer details through the provider's portal for approval.
4. Receive the agreed advance, typically 80 to 90 percent of the invoice value, within one to two working days.
5. Collect the remaining balance, less discount and service charges, once the customer pays the invoice in full.

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