Are you a business owner struggling with inconsistent cash flow? Is your company lagging in its bills and development project? Then maybe it is time you consider spot factoring.
This type of financing allows a business to sell one or more of its unpaid invoices without having to sign any long-term agreement. It is an efficient and instant way to obtain working capital that can be used to fuel growth, pay salaries, or take advantage of bulk discounts.
What’s more, it is faster and more flexible than traditional lending methods and requires little paperwork. It takes less than 48 hours to get the funds you need.
How Does Spot Factoring Work?
Spot financing relies on the creditworthiness of the company’s customers. When in need of funds, the business sends a copy of the client’s invoice to the factoring company. Then the factor verifies the invoice and runs a background check on the client.
If everything checks out, the factor advances a portion of the outstanding balance to the business. When the client completes payment on the invoice, the factoring company sends the remaining balance to the business, minus the discount rate and any processing fees.
Invoice financing can be done on two bases – recourse or non-recourse. On a recourse basis, if the client fails to pay their debt within the specified period, the business provides a new invoice of equal worth. Most factors prefer this type of financing to reduce the risk they assume.
In contrast, in non-recourse factoring, the factor purchases the invoices and becomes responsible for collecting the debt. It serves as credit insurance at a fraction of the cost. Should the clients decide to default, the factoring company is liable for the damages.
Typically, non-recourse factoring costs more than recourse factoring to compensate for the risk of non-payment.
The most apparent advantage of spot factoring is its flexibility. It allows businesses to work on a single, large transaction without worrying about its negative impact on their cash flow.
Why Spot Factoring Might Be A Little More Expensive
Though spot factoring offers maximum flexibility to its users, it may also be more expensive than conventional financing methods for the following reasons;-
Risk: Factoring companies tend to view spot financing transactions as riskier than conventional transactions. Usually, the business does not provide any extra invoices as collateral in case of a failed payment. Should the client fail to meet their end of the bargain, the factor stands to lose its money.
Management: The invoice management fees for spot financing are higher as spot factoring transactions have to go through the same process as conventional transactions.
Uncertain Volumes: Spot factoring volumes are usually unpredictable, making it challenging for factoring companies to plan for their revenues and capital requirements.
Minimal Invoice Size: The majority of factoring companies will only advance funds for invoices larger than the least invoice size. Though this amount varies depending on the factoring company, most require the invoice to be at least a few hundred dollars.
Spot And High-Volume Factoring: In high-volume financing, the factoring company requires the business to bring forth all its invoices. This means you will have to pay a separate fee on all the invoices, even if you only want one or two of them factored. Unlike spot factoring, you have less control over your finances and the fess charges.
Here are some of the ways how spot factoring differs from whole ledge factoring;-
Fee Structure: Thanks to the economies of scale, spot factoring usually has a higher discount rate, whereas the cost of factoring the entire book may be lower. Furthermore, some factoring companies may charge penalties if the company decides to forgo the long-term agreement. That does not apply to spot factoring.
Commitment Level: Spot factoring does require a long-term contract or monthly installments. It is the perfect financial tool that businesses can use whenever they need money for as long as they have creditworthy customers.
Paperwork Amount: In high-volume financing, the business needs to present an application, receivable aging report, articles of organization, accounts receivable aging report, and in some instances, financial statements.
On the other hand, spot factoring an aging report and financial statements are often not needed.
It is not every day that a business has adequate funds to run its day-to-day operations. However, that does not mean that everything should come to a standstill. Spot factoring is a flexible and fast way to get funding for your business to keep things going.