This article is a part of our short term cashflow solution series – see here for more information on sport factoring.
Spot factoring is an increasingly popular form of invoice finance that could, when used efficiently, help to transform your cashflow situation. But what is spot factoring, and how can it help you?
What is spot factoring?
Spot factoring, also sometimes known as ‘selective factoring’ or ‘single invoice factoring’, is a form of invoice finance. It allows you to borrow against the value of your unpaid invoices.
Under a spot factoring arrangement you pass a single invoice, or a small ‘bundle’ of invoices, to a third party invoice finance company known as a factor. They then pay you a proportion of the face value of the invoice. The factor then chases the invoice on your behalf, receiving payment from your client.
How does this differ from other invoice finance methods?
The defining characteristic of spot factoring is that it involves the ‘sale’ of just a small number of invoices – or, indeed, just one. This is in contrast with traditional invoice finance methods, in which businesses are often required to enter into wholesale agreements, under which they commit to put all or a proportion of their invoices through the invoice finance process.
It is also important to note that spot factoring differs from invoice discounting in a key way. In an invoice discounting arrangement you retain control of your credit processes, and you chase the invoice yourself. In a spot factoring arrangement, on the other hand, that responsibility is passed to the factor.
What are the advantages of spot factoring?
There are a range of advantages associated with spot factoring when compared both with traditional invoice finance methods, and with other finance routes.
Perhaps the most important advantage of spot factoring when compared with other invoice finance options is the freedom from long-term contracts. Unlike in other factoring or invoice discounting arrangements, you are not obliged to enter into a contract lasting from 6 to 12 months or more with the invoice finance company. Instead, you simply choose which invoices you want to ‘sell’. This can be hugely beneficial to your cashflow, as it enables you to free up cash when you need it most.
Spot factoring also has a potential advantage when compared with invoice discounting. As you pass responsibility for chasing the debt on to your factoring company, you no longer have the bear this resource burden. This means that you can get back to running your business, rather than running around chasing payment.
Additionally, spot factoring has some key advantages when compared with more traditional sources of funding. To begin with, like all invoice finance arrangements, spot factoring does not generally require you to undergo a credit check – although you should remember that your clients may need to be credit scored. This means that spot factoring remains an option even for new businesses, or for those with poor credit history, as long as your own credit control processes are sound.
With the advantage of flexibility, spot factoring can work out to be much cheaper than conventional funding methods, and particularly more affordable than bank finance. Although spot factoring tends to be slightly more expensive than traditional factoring or invoice discounting, under many invoice finance methods it is possible to receive as much as 95 per cent of the face value of your invoice from the invoice finance company.
So what next? How about a 10 minute chat about our options to an impartial expert? Call now on 0845 388 9725 or fill in the Get A Quote form to give our experts the heads up on your requirements. And remember, we always here if you need us for any business finance guidance.