So you’ve delivered the service, and issued the invoice, but now you’re waiting 30, 60 or even 90 days for payment. How do you keep your business running smoothly while waiting for your customers to pay? That’s where spot factoring comes into play.
What is spot factoring?
Spot factoring, single invoice factoring or selective invoice finance lets businesses access cash by focusing on a single invoice. Unlike traditional factoring, where companies are required to factor the majority or all of their invoices, spot factoring provides a more flexible, one-time option that suits immediate and specific needs. This means you can choose to factor just one invoice at a time, based on your immediate cash flow needs.
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How does spot factoring work?
Spot invoice factoring is a straightforward process that allows you to sell your unpaid invoices for cash.
First, your business issues an invoice to a customer for goods or services provided. Instead of waiting weeks or months for them to pay, you choose to factor that specific invoice.
Second, you’ll approach a spot factoring company, which will advance you a percentage of the invoice’s face value, usually 70% to 90% within 1-3 days.
Third, the factoring company takes over the collection process, ensuring that the customer pays the invoice directly to them. Once the customer settles the payment, the remaining balance (minus the factoring costs) is released to you. Simple, right?
Spot factoring example
A logistics company completes a large project for a client and issues a £50,000 invoice with a 60-day payment term. Instead of waiting for the client to pay, the company factors the invoice, receiving £40,000 upfront (80%). When the client pays the invoice, the logistics company gets the remaining £10,000, minus the factoring fee.
Who can benefit from single invoice factoring?
Invoice spot factoring is ideal for businesses that need a cash flow boost but don’t want to commit to long-term agreements. Let’s dive into the types of businesses that can benefit from it the most.
1. SMBs
For small and medium-sized businesses, cash flow can often be unpredictable. Whether you’re waiting for large clients to pay or facing sales fluctuations, single invoice factoring helps bridge the gap. Instead of stressing over unpaid invoices, you can access the cash you need almost instantly.
2. Businesses with slow-paying clients
This is one of the top reasons why companies use factoring. If your business regularly deals with clients who have long payment terms, spot factoring can provide quick access to funds. Rather than chasing down payments or worrying about delayed cash flow, you can focus on growing your business.
3. Startups in need of short-term cash
Startups often have limited resources, and waiting for clients to pay can be a significant hurdle. Spot invoice factoring gives them the ability to factor individual invoices when they need a cash infusion without taking on long-term debt.
A Xero Report in 2023 revealed that almost 72% of small business owners experienced cash flow problems in the past 12 months.
Spot factoring vs traditional factoring
When it comes to financing options, the debate between spot factoring and traditional factoring is ongoing.
1. Flexibility
The biggest advantage of spot factoring is its flexibility. Unlike traditional invoice factoring, which locks you into factoring all of your invoices, spot factoring companies allow you to pick and choose individual invoices to factor. This is great if you need short-term cash or don’t want to be bogged down into a long agreement.
2. Cost
While single invoice factoring gives you more freedom, it does come at a higher cost. The fees for a spot factoring agreement tend to be higher than traditional factoring due to the added flexibility. With traditional factoring, you might get a lower rate, but you’ll be required to factor multiple invoices over a longer period.
3. Control over client relationships
With spot factoring, you maintain more control over your client relationships because you’re not factoring every invoice. Traditional factoring often involves the factoring company interacting with your clients directly, which might not be ideal if you want to keep your financing arrangements confidential. There’s the option of confidential invoice discounting, by the way.
Benefits of spot factoring
- Flexibility: The flexibility of spot factoring is unmatched. You only factor invoices when you need to, with no obligation to factor all of them or get yourself into lengthy contracts.
- No debt: Unlike business loans, spot invoice factoring doesn’t add bad debt to your balance sheet. Because you see, you’re not borrowing money; you’re simply accessing cash that’s already tied up in your invoices.
- Preserve client relationships: With spot factoring, you’re not selling all your invoices, which means not all of the clients would know you’re using a factoring service.
- Improved cash flow management: Spot factoring allows businesses to manage cash flow more effectively. You don’t have to wait for customers to pay their invoices—especially those with long payment terms.
Disadvantages of spot factoring
- Limited availability: Not all factoring companies offer single invoice finance, and those that do often have stricter requirements and higher rates. If your business is new of you don’t have creditworthy clients, it can be harder to find a provider willing to work with you.
- Dependency on client payments: Selective invoice factoring doesn’t eliminate the risk of late or unpaid invoices. If your client defaults, the factoring company may hold you responsible for the advance, or at least delay the release of the remaining balance.
How to choose a spot factoring provider
Choosing the right spot invoice factoring provider can make or break your experience. But how do you know you’re making the right choice?
- Reputation matters: You don’t want to find out the hard way that they’re slow to release funds or tack on hidden fees. Look for reviews, testimonials and even ask other business owners about their experiences.
- Understand the fees: Spot factoring fees can vary from provider to provider, so make sure you understand what you’re getting into. Don’t just look at the initial discount rate – ask about any other additional service or administrative fees.
- Customer service: You don’t want to be left hanging when you need fast answers. Whether it’s a question about the status of your funds or help with the factoring process, having a provider with responsive customer service is crucial.
Get In Contact With Top Spot Factoring Providers in the UK With ComparedBusiness
Securing a spot factoring deal for your business in the UK is easy with ComparedBusiness. We provide you with secure invoice factoring quotes from top providers in the UK. Just submit your requirements in less than 2 minutes and we will match you with them. Time to solve your cash flow problems today.
FAQs
Factoring means a business is selling its unpaid invoices to a factoring company. For example, a watch manufacturing company with a £50,000 invoice can sell it to a factor for an immediate advance of 80%, providing quick cash while the factor collects the payment from the client.
With spot factoring, businesses can generally access funds within 24-72 hours after submitting the invoice to the factoring company, like other forms of factoring. The speed, however, depends on the provider.
The type of invoices that can be factored are the ones that are issued to creditworthy clients with clear payment terms. These include B2B or B2G (business-to-government) invoices, as long as they are for completed goods or services and are not past due.
