Spot factoring differs from traditional invoice factoring in that it enables a business to obtain cash from its unpaid invoices without requiring a long-term contract. It is also known as single invoice factoring because businesses can factor just one invoice to qualify.
Since spot factoring is a short-term agreement, its fees and contract terms often vary from those of invoice factoring. In this blog, we will explain spot factoring costs in detail. We will also look at the key factors which affect these costs, who is eligible for spot factoring and how to save money when choosing a spot factoring company.
What is spot factoring?
Spot factoring is a selective invoice finance solution that involves selling one invoice at a time to a factoring company in exchange for 70% – 90% of the invoice funds. This agreement has no requirements for a minimum number of sold invoices or a fixed contract length. The service period lasts only until the business’s client pays the full invoice amount, which may take anywhere from a few weeks to months.
It is a smart option for businesses that want to factor only one of their highest-value invoices to access cash and maintain cash flow. This allows them to focus on other clients and manage their payment collections, while ownership of the factored invoice is transferred to the factoring company.
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How does spot factoring work?
Spot factoring works in a similar way to invoice factoring and involves selling a business’s unpaid invoice to a factoring company. Here’s how it works, step by step:
- The business issues an invoice to its original customer after delivering the promised products or services. The invoice contains all the relevant details and a payment request.
- The customer delays payment and asks for an extension or to pay in instalments due to the high balance.
- The business provides an extension to the customer to maintain its business relationships. However, the delayed payment disrupts its cash flow, which makes it difficult to serve other clients or manage daily operations.
- The business decides to use spot factoring and sells its invoice to a factoring company in exchange for 70%-90% of the invoice value upfront. With this money, it can cover employee payroll and manage other projects.
- The factoring company takes over the payment collection process from the client. It sends reminders and manages the entire collection process.
- Finally, when the customer clears the invoice, the factoring company transfers the remaining 10%-30% of funds to the business minus a 1%-5% spot factoring fee.
What are the spot factoring costs?
The discount rate is the main spot factoring fee and usually ranges between 1% and 5%. Because the factoring company provides this service on demand, it often charges a premium price in exchange for the short-term commitment and flexibility. This practice is different from invoice factoring, where a business factors more than one invoice and the discount rate gets distributed over multiple transactions and a longer-term contract.
The major cost of spot factoring is the factoring fee, which ranges from 1% to 5% of the total invoice value. The actual fee charged is calculated based on multiple factors like the business industry, the factoring company’s expertise, the length of the invoice, the creditworthiness of the client, and whether the agreement is of recourse or non-recourse factoring.
Spot factoring vs invoice factoring
| Feature | Spot Factoring | Invoice Factoring |
|---|---|---|
|
Commitment |
|
|
|
Flexibility |
Highly flexible |
Less flexible |
|
Fee structure |
Higher fees per invoice |
Lower fees spread over many invoices |
|
Speed of funding |
Typically, funds are released within 24–48 hours |
Fast, but depends on contract terms |
|
Best suited for |
Businesses with irregular cash flow or occasional needs |
Businesses with steady invoice volume |
|
Customer notification |
Usually, the customer knows about factoring, but there is also an option of non-recourse invoice factoring |
Can be confidential or disclosed, depending on the agreement |
Recourse Vs Non-Recourse Spot Factoring: What’s The Difference
Typically, when establishing a spot factoring agreement, one of the most significant considerations a business must determine is if they want to enter into recourse or non-recourse factoring.
Operationally, both options work the same way: your factoring provider gives you cash based on your invoice and takes payment from your client. The key difference is who has the risk if your client fails to pay.
| Feature | Recourse Spot Factoring | Non-Recourse Spot Factoring |
|---|---|---|
|
Who is at risk in case of non-payment? |
The business (you) |
The factoring company |
|
What if the client does not make a payment? |
You have to pay the advance back to the factoring company |
The factoring company covers the loss |
|
Cost |
Lower fees, as there is less risk to the lender |
Higher fees, as the lender assumes the credit risk |
|
Credit checks on your client |
Not as stringent |
The lender must conduct rigorous checks to ensure your client's credit history is reliable |
|
Best For |
Businesses with dependable clients and solid payment histories |
Businesses that invoice new clients or have higher-value invoices |
|
Protection against bad debt |
No, your business is liable |
Yes: your business is protected from bad debt |
|
Availiability |
Generally available |
Not all english-speaking providers have it |
|
Cash Advance Rate |
Usually 70% to 90% of invoice value |
Typically 70% to 85% of invoice value |
What option is the best fit for your business?
Recourse factoring is the cheaper option if your client has a good history of paying on time, and you have confidence they will pay off the invoice. Fees are lower, and realistically the chances of ever needing to repay the advance is low.
But, if you’re dealing with a new client, factoring an unusually large invoice or writing business in higher payment dispute industries, non-recourse factoring gives you peace of mind. You’ll pay a bit more for this option, but your business is fully covered if the customer doesn’t pay for reasons that are included in the agreement, like insolvency.
Notably, non-recourse factoring does not apply to all scenarios of non-payment. Most providers cover non-payment for insolvency only and not for disputes regarding the standard of goods or services. Always read the final contract to understand what is and isn’t covered.
Learn more about the difference between recourse vs non-recourse factoring.
How to minimise spot factoring costs
There are many ways to save money from a spot factoring agreement.
- Choose a reputable provider: When choosing a spot factoring provider, choose one that specialises in your specific business industry. One way to search for a trustworthy factoring company is to look into their previous clients‘ reviews and experiences.
- Factor invoices from creditworthy clients: Spot factoring costs depend largely on the creditworthiness of a business’s clients. For example, if a customer has a 30-day invoice but pays after 60 days, the longer payment period could result in a higher discount rate or a late payment fee. However, if the business tracks a client’s payment history and chooses one with a strong record of paying on time, the factoring company sees less risk of non-payment and may offer a lower discount rate.
- Submit larger invoices: When factoring a single invoice, businesses should submit one with a high balance. This helps them gain maximum benefits from the service and a high advance rate.
How Do I Apply For Spot Factoring: The Step-By-Step Process
Spot factoring is easy to apply for. Most providers have simplified and sped up the process, allowing businesses to go from application to receiving funds in as little as a few days. Here’s what to expect, from beginning to end.
Step 1: Pick The Invoice You Want To Factor
Choose an invoice to sell to a factoring company. This should, ideally, be a high-value invoice from a customer with an established payment history. Also be sure that the invoice relates to goods or services already rendered and that the terms of payment are clear (usually 30 to 90 days).
Step 2: Compare Providers Of Spot Factoring
It is advised to compare your options before approaching a single provider. Fees, advance rates and terms will vary from factor to factor. Visit a comparison service such as ComparedBusiness UK to get several quotes within minutes and find the most competitive deal for your specific invoice and sector.
Step 3: Submit Your Application
After choosing a provider, you’ll fill out a brief application. This usually means entering your business details, information about the invoice you want to factor out, and client details. Most applications can be filled out online in less than ten minutes.
Step 4: Due Diligence And Verification
The factoring company will then conduct checks to ensure the invoice is authentic and evaluate your client’s creditworthiness. This might mean reaching out to your payer accounts team directly to verify invoice details. Typically, this process lasts about 24 to 48 hours.
Step 5: Get Your Cash Advance
Once the invoice has been verified and approved, the factoring company then pays into your business bank account the agreed-upon advance, generally 70% to 90% of the invoice’s value. This can occur within 24 to 48 hours of approval.
Step 6: The Factoring Company Receives Payment
The factoring company becomes responsible for collecting payment from your client. They will remind you and take care of the process professionally instead of with emotion.
Step 7: Receive the Rest of Final Balance
The factoring company becomes responsible for collecting payment from your client. They will remind you and take care of the process professionally instead of with emotion.
Advantages of spot factoring despite costs
Despite the costs of spot factoring, it is still a highly viable option for businesses looking to factor invoices to cover any urgent expenses.
1. Flexibility to choose a single invoice
With spot factoring, a business can factor as low as a single invoice. There is no requirement to meet a minimum limit like in other types of financing solutions. Businesses usually use spot factoring to sell a high-value invoice instead of waiting for 30-60 days for its payment. The rest of the invoices do not get affected by the agreement and have no effect on those clients.
2. Short-term contracts
Spot factoring contracts are typically short-term as compared to standard invoice factoring agreements because of the smaller number of invoices involved. Once the client pays the selected invoice in full, the business receives the remaining balance. The factoring fee automatically deducts the spot factoring fee, after which the contract comes to an end.
3. Instant Cash support without restrictions
A business can typically access funds within 24-48 hours after the factoring company receives the invoice. A business can use the cash advance to clear any of its expenses, like upgrading its space, launching a marketing scheme, building a new product or clearing the payroll of its employees. There is no restriction on how the funds must be spent.
4. Not a debt for a business
One of the reasons why business owners choose factoring is that it is not the same as traditional bank loans. Spot factoring doesn’t appear as debt on a business’s financial records. That is because it simply means selling a future asset, which is the invoice itself. There is no loan or interest rate involved.
5. Helps manage clients effectively
With spot factoring, a business can choose to only sell selective invoices, which means that the factoring company only deals with one of the clients. The rest of its customer relationships remain unaffected.
Am I Eligible For Spot Factoring?
Spot factoring is accessible to many UK businesses; however, there are a few basic criteria that lenders will usually look for before granting an application.
1. Your business needs to be a B2B (business-to-business) company. Spot factoring is typically for companies that issue invoices to other businesses, not consumers. This type of financing means it is usually unfit for retail, e-commerce, or other B2C (business-to-consumer) paradigms.
2. You have unpaid invoices that have payment terms. For spot factoring, your business must have at least one unpaid invoice with a 30-day payment term or longer. The invoice must be for goods or services that have been delivered or completed; factoring companies will not advance money on invoices issued before the work is done.
3. Your customers must be creditworthy. The factoring company will check your business and your customer’s credit history and reliability since you’re transferring the collection risk to them. A client with a history of timely payments and a solid financial standing significantly streamlines the process.
4. Your business should be UK-registered. UK-based factoring providers only provide factoring services for businesses registered and operating within the United Kingdom.
5. Minimum invoices and turnover thresholds may be applied. Because of its flexibility, spot factoring ideally requires the minimum invoice worth to be profitable for it to process the transaction. Some borrowers demand a minimum turnover figure, usually more than £100,000 per annum, but start-ups and early-stage firms can be accepted if they have filed accounts.
6. You do not require years of legacy trading. Spot factoring works differently than traditional business loans do, where decisions rely more on your creditworthiness rather than the history of your business. It makes it available to recent businesses or companies with a limited financial record.
Quick Eligibility Checklist:
- Your company bills other companies (B2B).
- You have one or more overdue invoices (30+ day payment terms).
- The service or goods have been supplied already.
- Your customer has a sound credit profile.
- You operate a business in the UK.
- The value of the invoice satisfies the lender’s minimum requirements.
If you’re unsure if your business qualifies, compare providers and get a no-obligation quote. Each lender has its own criteria, so if one declines your application, another may help.
Get In Contact With Top Spot Factoring Lenders With ComparedBusiness UK
Securing a spot factoring deal for your business is easy with ComparedBusiness UK. We provide you with secure spot 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
Yes, with spot factoring, businesses can factor as low as a single invoice in exchange for a cash percentage of the invoice value. The contract lasts as long as the original client clears the full payment.
With Spot factoring, businesses can get paid within 24-48 hours after submitting an invoice to the provider. The factoring company takes this time to evaluate the authenticity of the invoice, analyse the creditworthiness of the client and gather the funds for the advance payment.
Yes, businesses can often successfully negotiate factoring fees with a spot factoring provider. The key here is to ask for a complete cost breakdown from your factoring company and see if there is any room for adjustment in the fee structure. To get a better idea of the fee structures, compare providers before finalising an agreement to get better rates.
