Spot factoring is a type of financial transaction in which a company sells invoices to a third party at a discount in order to obtain immediate cash.
This can be an attractive option for businesses that are experiencing cash flow problems or need to make large purchases quickly. There are a few things to keep in mind before entering into a spot factoring agreement, however.
First, the interest rate on the loan will be higher than if the invoices were paid over time.
Second, the company will lose some control over its accounts receivable; the third party will now have the right to collect payment from the customer.
Finally, spot factoring can have a negative impact on the company’s credit score.
Overall, spot factoring can be a helpful way to obtain needed cash quickly, but it is important to understand the potential risks and liabilities before agreement.
Spot Factoring Explained
Spot Factoring allows a business to access funds that are currently tied up in unpaid invoices. This is done by selling the invoices to a third-party (a factoring company) on a one-off basis. You will then receive payments much quicker than you otherwise would.
The business will first concur fees and charges with a spot factoring organisation and afterward conclude which invoice(s) it needs to allot to them. The spot factoring business, after the invoices have been selected, will pay a percentage of its worth, ordinarily around 70-85%, to the business in question.
Beyond this, the spot factoring company will then pursue the invoice from the customer, and once settled completely, will repay the business with the outstanding balance minus the concurred expenses.
Spot factoring is also known as Selective Invoice Discounting.
How does it work?
- Select the invoice(s) that you wish to factor. This can be either an individual invoice or multiple invoices from your ledger
- Your funder can provide you with an agreed cash advance, which can be up to 100% of the value of the invoices selected
- When the invoice is due, the funder receives payment from your customer, then makes the remainder of the balance available to you, minus the agreed fees
What are the pros and cons of spot factoring
Spot factoring, also known as single invoice financing, is a type of funding that allows businesses to quickly obtain capital by selling invoices at a discount.
This can be an attractive option for businesses that need cash flow to cover expenses or take advantage of opportunities, but it is important to understand the potential risks and costs before entering into a spot factoring agreement.
Additionally, spot factoring agreements typically have shorter terms than other types of financing, which means businesses may need to renew their agreement more often. This can be costly and time-consuming. Overall, spot factoring can be a helpful tool for businesses that need quick access to capital, but it is important to understand the potential risks and costs before entering into an
Advantages of spot factoring?
One advantage of spot factoring is that it can provide businesses with fast access to capital. In most cases, businesses can receive funding within 24 hours of submitting an invoice. This can be helpful in situations where businesses need immediate assistance with cash flow.
We will now run you through the main advantages of utilising spot factoring:
You will receive funds quickly –
As soon as you sell the invoices to a spot factoring company, you will receive funding. This instant access to cash makes spot factoring a perfect solution for businesses in need of money.
There is control over the arrangement –
When opting to use spot factoring, you will not have to put all your invoices up for sale, but instead be able to pick and choose which ones you want to hand over to a factor. This gives you control over any agreement that you make and means that you are always the one making the key decisions revolving around your business venture.
Easy to access –
This is a great form of finance that will be available to you even when you cannot access other more traditional forms of funding, such as business loans. Also, the invoice itself is the only security that will be required, so you can rest assured that you aren’t signing up for anything that will land you into further financial troubles.
The debt stops here –
You should be aware that there is no additional debt incurred to the company choosing to use spot factoring. This will put the business owner’s mind at ease when opting for this finance solution. This form of factoring is a great way to improve your working capital.
Disadvantages of spot factoring
There are also some potential disadvantages to consider. One risk is that businesses may end up paying more for financing than they would have if they had used traditional methods.
We will now investigate the potential disadvantages attached to spot factoring:
I can become costly –
There are most certainly cheaper alternatives if you are looking to raise finances, though they may not be as accessible as this. If you can find cheaper methods that are readily available to you, you should consider those first.
Possible relationship troubles –
The relationship between the supplier and client may become negatively affected by spot factoring, as it becomes the provider’s responsibility to chase up late payments of invoices.
Large invoices are better suited –
You should be aware that spot factoring works best with larger invoices, rather than small ones.
How much does spot factoring cost?
Spot factoring is a popular way for businesses to get their invoices paid. Spot factors tend towards having lower rates than other types of Factored Providers, but it’s still worth checking out all the options before making any decisions!
With this type of factoring there are no minimum monthly charges, just one set amount. The cost is competitive for short term borrowing with a low APR.
The perfect cash flow solution for you?
This form of factoring allows you to quickly unlock cash from your unpaid invoices.
As one of the market leading lenders in the UK, we can release up to as much as 90% of your unpaid invoices within a 24-hour period. The full amount will be released to you as soon as the invoice is paid by your customers. If this sounds like the perfect solution for your business, do not hesitate to get in touch with us today.
Be aware that this is only one form of finance, and there are many other types available for you to utilise. For instance, our confidential invoice discounting, or our single invoice factoring solution could be an ideal option for your venture to consider should you wish to fund your full ledger compared using spot factoring..
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.