Spot factoring in the UK: What is it and how does it work?
Also sometimes referred to as single invoice factoring, spot factoring is a form of accounts receivable finance designed to boost cash flow. A business generates income by selling an invoice to a third party (also referred to as a factor) for a percentage of the total value of the invoice.
This type of short-term business loan to boost cash flow is best suited to SMEs that have a fairly low level of invoice disputes, as well as a well- established client base.
What does spot factoring consist of?
The process to access spot factoring is simple and straightforward:
- The business negotiates and agrees a rate with the factoring company.
- The business then decides which invoice it will use to raise the funds against. Generally, they will choose an invoice of relatively high value, usually £25,000 or upwards.
- After establishing that the invoice is valid (i.e. not fraudulent), the factoring company will advance the agreed percentage of the invoice to the business. This will typically be between 75% to 85% of the value of the invoice.
What are the advantages of spot factoring?
The range of benefits of spot factoring for qualifying businesses are significant and include the following:
- You have rapid access to the money: As soon as the rates and fees have been established, the factoring company will pay over the money.
- You have access to cash on your terms: You decide which invoices to factor and when they are to be submitted for payment.
- There are no long contracts: Single invoice factoring enables you to raise funds on terms that suit you and without having to enter into long contracts. This also means no minimum limits and no ongoing fees.
- Security is not required: Typically, many factors require no security apart from the invoice.
- It gives you access to large amounts of cash: The large cash injection enables you to fund your payroll, develop your business, or invest in a new project.
- There will likely be no setup fees: Typically, spot factoring companies do not charge setup fees for their services.
- The process is low risk: As the factor advances funds against work that has already been completed, the process doesn’t carry much risk. You get access to working capital without entering into debt.
- There aren’t masses of paperwork to complete: The process is typically quick and straightforward, so you can focus on developing your business.
- The factor will ensure that the debt is paid: The spot factoring company will perform a credit check on the customer. They will also collect payment of the invoice, thus relieving you of a sometimes time-consuming and onerous task.
- A less than impeccable credit rating need not be a hurdle: As the factor is mainly concerned with the creditworthiness of the customer that your invoice has been issued, it won’t matter if you don’t have a perfect credit record.
What are the disadvantages to spot factoring?
- There is some loss of control: Factoring differs from invoice discounting in the sense that the lender takes over the responsibility to collect the debt. In real terms, this means that your company relinquishes some control of its sales ledger in this regard.
- It can be slow: Many factors promise 48-hours implementation. However, finalizing a single invoice factoring contract in such a short period is not always possible. Realistically, it can take up to a week or more to access the working capital from your invoice.
- It may impact your customer relationships negatively: As a third party will now be pressuring your customer for payment of the invoice, they will become aware that you are using invoice finance.
What types of business can benefit from spot factoring?
The many benefits of spot factoring make it well suited to specific kinds of businesses. For instance, seasonal businesses that don’t require year-round financing, but experience significant fluctuations in sales and therefore cash flow from month to month. Businesses that finance large, time-consuming projects can also benefit from this type of agreement, as do businesses that have only a few large debtors.
Is spot factoring suitable for your company?
This type of funding could be very well-suited to your organization if the following applies:
- If your company is engaged in Business-to-Business (B2B), or Business-to-Government (B2G) work.
- If your company is involved in quite large-scale projects.
- If your business doesn’t need a continuous source of working capital.
- If your business typically has only a few customers.
If these factors apply, spot factoring will give you a fast and reliable way to source cash advances on your invoices. This will make it possible for you to plough significant amounts of money into your business without incurring debt. However, it is important that you have customers that pay on time and are considered creditworthy.
Why is Spot Factoring Preferable to a Longer-term Contract?
Businesses may prefer spot factoring of a single invoice over a longer-term contract for the following reasons. If a company’s capital requirements vary significantly from time to time, they may only experience cash flow shortages periodically. This makes spot factoring ideal for their requirements. Longer term contracts also generally have annual fees attached to them, which is not the case with spot factoring.