Spot factoring explained
1) Spot factoring summary
Spot factoring is a way for businesses to fund cash flow flexibly by selling an individual invoice at a discount to a third party (a ‘factor’, or spot factoring company).
2) Also known as…
Spot invoice finance; Single invoice factoring; Selective invoice discounting
3) How spot factoring works
- The business assigns an invoice (typically a large invoice, upwards of £50,000) to the spot factoring company, having established and agreed rates and fees.
- The spot factoring company verifies the invoice and advances a percentage of the invoice face value to the business client upfront, typically 70-85%.
- When the end customer comes to pay the invoice, the factoring company collects the debt and makes the remaining balance available to the business client, minus their fees.
4) Advantages of spot factoring
For a fee, spot factoring companies can unlock funds tied up in an individual unpaid invoice so that your business receives a percentage of the funds without waiting for the end customer to pay. For a large invoice, this process can provide a large cash boost for the business client. With the funds, businesses can pay suppliers on time, pay payroll or inject cash into a new project, office or product.
5) Disadvantages of spot factoring
Spot factoring companies often charge a premium for the flexibility on offer, and so business clients can end up paying a lot more in fees than in equivalent ‘whole ledger’ factoring facilities .
It can take over a week get set up with a spot factoring company, which means that if you need finance quickly spot factoring may not be suitable.
A lot of business clients prefer to handle their own credit control so they can maintain friendly customer relationships, and spot factoring companies often insist on chasing the end customer for payment.
Assigning an invoice
Unlike with traditional ‘whole ledger’ factoring , the business may not have an existing relationship with the spot factoring company. It may take several days or weeks to apply and be approved, and once that is done funding is advanced when the business client ‘assigns’ an individual invoice to the spot factoring company.
A spot factoring company will want to verify the invoices that are assigned to them by a business client in order to make sure they are real and not fraudulent. They may verify invoices over the phone, by calling the end customer’s accounts payable team, via email or via post.
7) Next steps
It’s quick and easy to access funds, which means you can get the cash flow you need to get on with business. With MarketFinance, you get:
- Fast funding: quick funding decisions and set-up
- Hassle free experience: easy to use digital interface
- Help in real-time: personal customer support
- Straightforward costs: no hidden fees