Running a business can feel overwhelming especially when cash flow is tight. Ever had one of those moments when you’re waiting on a big client to pay an invoice, but bills are due right now? That’s where single invoice factoring or spot factoring comes in.
Ready to dive deeper? Let’s explore how it works and when it’s the right fit for your business.
What is single invoice factoring?
Unlike traditional invoice factoring, where you sell off all your outstanding invoices, single invoice factoring lets you pick and choose which invoices to factor. Think of it as a pay-as-you-go financing option. You sell one unpaid invoice to a factoring company in exchange for an immediate cash advance. Once your customer pays, you get the rest, minus fees.
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How does single invoice factoring work?
Here’s how the process works:
1. Submit an invoice
You start by choosing one outstanding invoice that you’d like to factor. The invoice must be from a creditworthy client – after all, the factoring company is betting that they’ll get paid. You submit this invoice to the factoring company, and they verify its legitimacy and your client’s payment history. It takes about 1-2 days, generally.
2. Get a cash advance
Once the factoring company is satisfied, they’ll give you advanced cash on your invoices, which is usually 70% to 90%. The percentage varies based on your industry, the size of the invoice and the risk level of your client. For example, if you submit an invoice worth £10,000, you might get an advance of £8,000 upfront. Not too shabby for a quick cash boost, right?
3. Repayment from your client
Once you sell your unpaid invoices, the factoring company owns them. They’ll wait for your client to pay the full amount, which generally takes around 30 to 90 days, depending on the payment terms. When the client finally settles the invoices, the factoring company sends you the remaining balance, minus the fees.
4. Pay the fees
Fees are where it’s crucial to pay attention. The factor charges a fee, which is typically 1% to 5% of the invoice value. In some cases, fees could be higher depending on your client’s risk or how long it takes them to pay.
So, if you received a £8,000 advance on a £10,000 invoice, and the fee is 3%, you’d get the remaining £1,700 once your client pays up (£2,000 balance minus £300 fee).
Why do businesses opt for selective invoice factoring?
Many small to medium businesses in the UK opt for this option because of its flexibility. You’re not locked into long-term contracts or forced to factor all your invoices. This is particularly useful if your business faces seasonal peaks or irregular cash flows.
Another benefit? The whole process typically takes just a few days, with approvals sometimes as fast as 24 hours. For businesses dealing with emergency expenses, that’s a game-changer.
According to Natwest Group’s study in 2023, 27% of UK SMEs are owed between £5,000 and £20,000 in unpaid invoices.
Benefits of single invoice factoring
Every business owner knows that cash is the lifeblood of any operation. And spot factoring offers a flexible solution to counter the cash flow problem. The benefits?
1. Flexibility without long-term contracts
You’re not tied to factoring your entire sales ledger or entering into long-term contracts. Instead, you can pick and choose which invoices to factor based on your immediate cash flow needs. For instance, imagine you’re a small manufacturer with a large order that’s due in 60 days, but you need cash now to purchase raw materials.
Rather than waiting for the client to pay, you can factor just that one invoice and keep your production moving.
2. Fast access to cash
Time is money, especially when your business needs capital quickly. With single invoice finance, you can typically access funds within 24-48 hours after submitting an invoice. This quick turnaround is a lifesaver for businesses that can’t afford to wait for traditional loans to be approved.
3. No debt, just cash flow
One of the reasons why business owners choose factoring is that it doesn’t create debt on your balance sheet. You’re not borrowing money, but rather selling an asset – your invoice. This means your company’s debt ratio remains unchanged.
4. Strengthens client relationships
The factoring company is responsible for taking payments from your customers, which can sometimes become confusing and untrustworthy for them. This is one of the biggest disadvantages of factoring. But with single invoice factoring, you can choose to only sell selective invoices, which means the rest of your clients remain unaffected.
You keep collecting payments from them yourself.
Cost of single invoice factoring
Generally, the costs of single invoice factoring = the cost of accounts receivable factoring. The most significant cost is the factoring fee, which ranges from 1% to 5% of the invoice value. For example, an invoice worth £10,000 might incur a 3% fee, meaning you’d pay £300 for the service.
Now, some factoring companies may charge additional fees, such as administrative costs or late payment fees, depending on how long it takes your client to pay. But this is not common. However, it is crucial to read the fine print while making the agreement and asking for a full breakdown of costs.
Downsides of single invoice factoring
While selective invoice factoring can be a great way to ease cash flow issues, it’s not without its risks.
1. Impact on client relationships
Once you sell your invoice to the factoring company, they take over the collection process. While most reputable factoring companies in the UK are professional, some clients may not appreciate dealing with a third party. If the factoring company handles collections poorly, it could harm your reputation or even damage your relationship with your client.
2. Cash flow dependency
Relying on single invoice factoring for quick cash might solve today’s problem, but it could create a bigger issue down the road. If your business becomes too dependent on factoring to keep the cash flowing, you may find yourself stuck in a cycle where you’re continually selling invoices to cover immediate expenses.
3. Limited companies available
Some cities in the UK might not have factoring companies that offer selective invoice finance facilities. This can create serious issues as you’re left without any options. But don’t worry, with ComparedBusiness, you will be linked with top lenders who provide single invoice factoring services to you.
Is single invoice factoring right for your business?
Well, like most things in business, it depends on your situation. If you’re facing a short-term cash crunch and don’t want to lock yourself into a long-term contract, selective invoice factoring could be a breath of fresh air.
However, it’s essential to remember that factoring isn’t a free ride. The costs, while manageable for one or two invoices, can add up if you make a habit of it. And let’s not forget the potential for client friction if the factoring company doesn’t handle collections as smoothly as you’d like.
In short, single invoice factoring works best when used strategically.
Get In Contact With Top Single Invoice Factoring Lenders in the UK With ComparedBusiness
Securing a single invoice 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
Single invoice factoring gives businesses the flexibility to sell one specific invoice for cash, rather than factoring all of their invoices through long-term contracts. This financing option is ideal for businesses needing occasional funding without being drawn into long contracts.
Funds through single invoice factoring or spot factoring can be accessed within 24-72 hours after submitting an invoice. This fast process makes it a great option for businesses stuck with financial emergencies.
Factoring fees typically range between 1% to 5% of the invoice value, and the advance rate is usually 70%-90%. While it could be more expensive than traditional loans, it provides faster access to cash, which can outweigh the costs for businesses facing urgent financial needs.
