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 this long for your customers to pay? Spot factoring can help in this situation.
What is spot factoring?
Spot factoring (also known as 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.
How much does spot factoring cost?
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, type of provider, number of invoices factored, the length of the invoice, creditworthiness of the client, and whether the agreement is of recourse or non-recourse factoring.
For example, a business completes a large project for a client and issues a £50,000 invoice with a 60-day payment term. Because of some cash flow difficulties, it decides to sell the same invoice to a factoring company. With spot factoring, the business receives 80% of the invoice value upfront with a factoring fee of 2%. When the original client pays the invoice, the business gets £9,000 total (the remaining 20% of the invoice value minus the factoring fee).
Who can benefit from spot factoring?
Spot invoice finance is mainly for businesses that wish to factor a few selected invoices in exchange for instant cash flow without lengthy contracts. Different types of businesses choose it also because it does not show up as a debt on their financial records, unlike traditional bank loans. Spot factoring is usually best suited for businesses in the following industries:
1. Small to medium-sized businesses
For businesses that are just starting, it can often be difficult to manage a lack of an extensive client base, along with an unpredictable cash flow. Especially if a business industry has longer payment terms on average, invoices take too long to get cleared. Not to mention, the delayed payments on top of the typical 30 to 90-day invoices.
All those combined factors create a gap in the cash flow of a business, which restricts it from paying employees, managing daily expenses or taking on new clients. That is where spot factoring plays its role and allows a business to factor one high-value invoice and continue its usual work with the funds from the upfront advance.
2. Businesses with slow-paying clients
Spot factoring can provide quick funds to a business dealing with slow-paying clients. Rather than selling all the invoices, it selects a few large-amount invoices. Then, the ownership of the factored invoices fully transfers to the factoring company, and it deals with the relevant clients directly. The business follows up with the remaining invoices itself, and they don’t get affected by the agreement in any way.
3. Startups with limited resources
Startups often have limited funding and administration resources, so waiting for clients to pay becomes a major hurdle. In spot invoice factoring, the factoring company follows up with the client, sends payment reminders and then collects the invoice on time. This process saves the business from chasing client payments and spending its limited resources on managing them.
A Xero Report 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 option is great if you need short-term cash or don’t want to be bogged down in 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 factoring for businesses that want to keep the agreement private.
Benefits and Drawbacks of Spot Factoring
| Benefits of spot factoring | Drawbacks of spot factoring |
|---|---|
|
Provides flexibility to choose invoices to factor. |
Dependence on the creditworthiness of clients. |
|
Does not appear as a debt on business records. |
Limited factoring companies offer the service. |
|
Improves cash flow management. |
|
|
Client confidentiality for non-factored invoices. |
|
Advantages of spot factoring
- Flexibility: The flexibility of spot factoring is unmatched. You only factor invoices when necessary, with no obligation to factor all of them or sign long 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 company?
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.
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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.
