Business Finance

Spot Factoring: Turn Your Receivables Into Cash

Nov 13, 2023 • 8 min read
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      As a small business owner, your cash flow is your lifeline. But what happens when the cash doesn’t flow just when you need it? Imagine if there were a way to unlock the funds tied up in your unpaid invoices, instantly. 

      Welcome to the world of spot factoring, also known as single-invoice factoring. This financial tool is all about turning your invoices into immediate cash, enhancing your liquidity and keeping your business running smoothly. Let’s delve into how spot factoring can support your business growth.

      What is spot factoring?

      Spot factoring, also known as single-invoice factoring, is a financial arrangement where businesses sell a specific outstanding invoice at a discount to a factor or third party. This arrangement provides immediate cash flow for the business, rather than waiting for the customer’s payment term to end. Single-invoice factoring is beneficial for businesses that need quick access to cash. It’s also a flexible option since it’s done on an invoice-by-invoice basis, unlike traditional factoring, which involves a long-term contract and factoring all invoices.

      How spot factoring works.

      Getting started with spot factoring involves a few steps which we’ve broken down for you:

      1. Identify the invoice – First things first, you need to identify the invoice you want to sell.
      2. Choose a factor – Next, you’ll need to find a factoring company. You may want to consider different factors, such as their fee structure, the percentage of the invoice they’ll advance, and their reputation.
      3. Sell the invoice – Once you’ve chosen a factor, you sell them the invoice. Typically, they’ll advance you a large percentage of the invoice value, often between 70% and 90%, straightaway.
      4. Customer pays the factor – Now it’s time for your customer to pay the invoice, but instead of paying you, they’ll pay the factor.
      5. Receive the remaining balance – Once the factor has received the invoice payment from your customer, they’ll give you the remaining balance of the invoice, minus their fee.

      This process allows you to access the cash tied up in your invoices immediately, helping to maintain a healthy cash flow for your business.

      Spot factoring rates and terms.

      Spot factoring rates and terms can vary depending on the factor you choose, as well as factors such as your business’ creditworthiness and the creditworthiness of your customers. Generally, the advance rate ranges from 70% to 90%, with a fee of around 1% to 5% for every month that the invoice is outstanding.

      Qualification criteria for spot factoring.

      To qualify for spot factoring, there are a few key criteria you’ll need to meet. First, your business must issue invoices to customers on credit terms. The invoices you factor should be due and payable within 90 days. They need to be free of liens and encumbrances, meaning they aren’t pledged as collateral in another financial arrangement.

      Additionally, the customer you’re invoicing must have a good credit history, as the factor will collect the money directly from them. 

      Lastly, the invoice must be for work that has been completed or goods that have been delivered. 

      Each factoring company may have its own specific requirements, so it’s essential to review these before proceeding.

      Pros and cons of spot factoring.

      Like any financial tool, spot factoring has its pros and cons. Here are a few to consider:

      Immediate access to cash

      Flexible option, as it’s done on an invoice-by-invoice basis

      No long-term contracts or commitment

      Allows business owners with low credit scores to qualify based on their customers’ creditworthiness
      Higher fees compared to traditional lending options

      Can impact customer relationships if they are required to pay the factor instead of you

      Might not be suitable for businesses with consistent cash flow issues

      Spot factoring vs. accounts receivable factoring.

      Both of these methods are effective ways to improve cash flow. However, they have some key differences that make them more appropriate for different situations.

      Spot factoring focuses on one invoice at a time. This type of factoring is ideal for businesses that occasionally need quick cash or want to control which invoices are factored. 

      Accounts receivable factoring involves selling a bulk of invoices to a factor. This is a more comprehensive solution that offers consistent cash flow. It’s ideal for businesses that have a number of unpaid invoices and need a steady influx of cash. Unlike single-invoice factoring, accounts receivable factoring usually involves a long-term contract with the factoring company.

      In both cases, the factoring company will handle the collection of payments, but the choice between spot factoring and accounts receivable factoring ultimately depends on your business’ needs and cash flow situation. Make sure to thoroughly evaluate both options to figure out which one is the best fit for your company.

      Is spot factoring right for your business?

      Spot factoring can provide a much-needed boost for small businesses experiencing cash flow issues. However, it’s not necessarily the best option for every business. Consider your specific needs and weigh the pros and cons before making a decision. And as always, it’s important to consult with a financial advisor or expert before committing to any financial tool. But if you’re looking for a way to turn your receivables into cash and keep your business running smoothly, spot factoring might just be the solution you’ve been searching for.

      Ready to get started? See if you’re eligible for accounts receivable financing.

      Quickly compare loan offers from multiple lenders.

      Applying is free and won’t impact your credit.

      About the author
      Lendio Editorial Team

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