What Is Spot Factoring? You May Know it As Single Invoice Factoring
The world of business finance is constantly expanding. Just when you think you’ve heard all the terms and you know what they mean, something new appears on the scene.
One recent buzzword is “spot factoring.” While it isn’t necessarily a new concept, we’ve seen this economic solution resurface with the trend of using alternative financing.
What is spot factoring?
You’ve probably heard it called “single invoice factoring,” and that’s a basic summary of it.
However, there’s a lot more involved in how it works.
Spot factoring lets businesses fund their working capital flexibly without taking out a loan.
In essence, it’s collecting money you’re owed for work you already did without waiting for the client to pay.
Is this form of financing right for your business?
This article will teach you everything you need to know about spot (single invoice) factoring, so that you can decide.
Spot Factoring Defined
Spot factoring is a lesser-known method businesses use to increase their cash flow. Unlike other financial alternatives, such as grants, you can use this type of funding without restrictions.
As a business owner, when you have unpaid invoices and need the money you’ve already earned, you don’t have to wait for the client to pay.
You can sell that individual invoice to a third party, called a spot factoring company, or a “factor.”
How It Works
If you sell your services or product via invoices, the money you’re owed sits in your accounts receivables until the customer pays. Each client has an outstanding invoice.
So your business needs working capital now, but you haven’t yet collected on an outstanding invoice.
A typical accounts receivable transaction can take anywhere from 30 to 90 days or more for payment. Instead of trying to predict when your client will pay, you can sell it to a factor.
Spot factoring takes this variable out of consideration when budgeting expenses and income.
Related: How to Collect More Accounts Receivable [9 Tips]
Spot Factoring, Step-By-Step
Another reason spot factoring is so popular with business owners is that they don’t have to do a lot of paperwork to get approved. Most of the step-by-step process is streamlined for you by the factoring company.
Although every third party buyer is different, the general flow looks something like this:
Step One
You provide the goods or services to your client and invoice them.
Step Two
Choose the invoice you want to submit for single invoice factoring.
Step Three
The factor pays you an agreed-upon sum for the first installment.
Step Four
The factor collects the invoiced amount from the customer.
Step Five
The factor settles the transaction.
Step Six
The rest of your agreed-upon installment deposits into your account from the factor.
You’ll receive the full amount of your invoice minus the company’s fees. Most of the total will be paid to you in the first installment, with any remaining balance owed returned to you in the second deposit.
The Many Uses of Spot Factoring
As with all business financing solutions, there’s no one-size-fits-most method. For example, spot factoring won’t work for you if your business deals with cash transactions instead of invoicing.
But if you want to turn a single invoice (or a handful) into cash quickly, without a long-term contract, it might be advantageous for your business.
Business Opportunities for Spot Factoring
Is your business ready to grow, but you don’t have the cushion in your cash flow to move forward?
Do you need a little extra working capital to pull through a slow season while you’re waiting for your seasonal rush?
Is there an incredible deal going on with one of your suppliers, but you don’t have the funds to take advantage of it?
If any of these sound familiar, spot factoring might be your solution.
In general, single invoice factoring is a smart financial idea when you have a short-term problem.
Loans can give you the money you need, but you have to pay them back over a long-term period. Grants are essentially free cash; however, it can take months to get the funds, and you can only use them as the terms of the grant stipulate.
Selling an invoice, which is money you already are owed, simply means you get your cash faster. There are no repayment terms to deal with, and you recoup almost all of the amount due.
Discover: Federal Grants for Women: Multiple Grants for Entrepreneurs & 11+ Small Business Grants for Minorities
Pros and Cons of Single Invoice Factoring
Before you agree to any third party getting involved in your finances, you need to weigh the pros and cons.
Each alternative solution can be beneficial in the right situation. If the disadvantages outweigh the advantages, you should keep looking for other options.
Why Choose Single Invoice Factoring
It’s quite possible that single invoice factoring is one of the easiest ways to get working capital outside of your standard billing practices.
For one thing, there is no long-term commitment. You choose when to sell an invoice and which invoice(s) to use.
You’ll find out quickly whether the company will buy your invoice, and if they agree, you get cash in your hand in as little as 24 hours. There are no monthly loan repayments to worry about. You still get everything you’re owed once the customer pays, minus the third party’s fees.
Cautions of Spot Factoring
Sounds perfect so far, right?
There are a few things to be cautious about, though, especially if you end up working with the wrong business. Some factoring organizations have high fees and hidden, expensive terms.
Check over the fine print carefully to make sure you know what the company is charging. There are different fees and commissions involved. The terms you see from one factor may be significantly lower or higher than another.
Keep in mind that it’s usually a better financial move to sell a larger invoice than multiple smaller ones. Because there’s less work involved for the factoring company, you end up with fewer fees.
You should also be aware that the factor company contacts the client directly, impacting your working relationship with them. You can give the client a heads up that they’ll be hearing from this third party for payment, so they know it’s legitimate.
You may also like: The Pros and Cons of PO Financing
The Optimal Way to Use Spot Factoring
What are your goals for the cash you’ll receive selling your invoices?
Knowing your purpose for needing the funds will help you use spot factoring to its optimal potential.
Tips for Choosing a Factoring Company
Start by setting your short-term goal. Then, research the factoring companies that work with businesses like yours.
Client Risk
Now is an invoice acceleration solution with multiple advantages over the competition. They take on the risk of nonpayment for you through their simple onboarding process.
Some companies come back on the business if the customer doesn’t pay. Now offers non-recourse funding.
This means that if they chose to buy the invoice from you, and they don’t get paid, you aren’t responsible for the loss.
Software Integration
NowAccount also integrates with QuickBooks Online. This feature gives you the option to upload your invoices and add customers to Now’s program without a hassle. It’s a helpful tool to have if you end up using the company as your go-to when you need to sell an invoice.
(You can learn how to to take full advantage of QuickBooks’ features in our QuickBooks Tips Guide.)
Read the Fine Print
Whichever company you choose — watch the terms and fine print. Only work with factoring services that have reasonable rates you can afford to pay.
Narrow Down Your Invoices
Choose your invoices strategically. It’s better to factor a single hefty invoice over multiple small ones for the same total. The factoring arrangements may include a discount rate when you sell an invoice over a certain amount, too.
With these tips in mind, you’re on track to a successful spot factoring transaction.
Related: Invoice Factoring Guide for Small Businesses
Alternatives to Single Invoice Financing
Spot invoicing isn’t the only way to get cash for your business. If this doesn’t sound like the solution you’re looking for, check out these alternative lenders.
Small Business Loans
A small business loan is an option when you need more working capital than an invoice can provide. These are available through traditional avenues, like banks and credit unions, or online through independent lenders.
A small business loan is helpful when you need a large sum of money upfront. A loan may solve cash flow problems, expansions, and other long-term issues.
However, you’ll need to pass a credit check (both personal and business), and you’ll have monthly repayments for the terms of the loan.
Business Line of Credit
Would it be helpful to have a large pool of cash to use as you need it rather than the entire amount at once?
If so, a business line of credit can help.
These financial solutions work the same way a credit card does. Your lender gives you access to a certain amount of money. You pay your bills or make purchases from that account and pay interest on the balance you use.
As you pay off what you used, the money is available to you again. But at some point, per the repayment terms, you’ll have to pay back what you borrowed, plus the hefty fees and interest.
Approval for a business line of credit requires good credit, as well as monthly minimums paid back to the creditor. As far as financing options go, it can be better than a loan if you’ll use the funds available to you only as needed.
Merchant Cash Advances
Not all businesses have the financial stability to get into a loan with a long-term repayment plan. And some companies are just starting out or have had a rocky patch impacting their credit scores.
If you need immediate cash to get you through an emergency, a merchant cash advance (MCA) can help. However, these should be a last resort because they come with substantial fees and extremely high-interest rates.
MCA providers are willing to take on companies that other lenders consider too much of a risk. The approval process is easier, and you’ll get your cash within one day.
But be extremely cautious about taking on these loans. The advance rate for lending to you comes at a very high cost. Most MCA lenders will require access to your bank account, and they’ll take back their money (plus interest) out of your credit card receipts daily.
See also: Are Grants Always Better than Loans?
Conclusion
When your business’s working capital isn’t quite enough, turning to another financial solution can get you through the obstacle. It can be a prudent method of putting your company on better economic ground.
Traditional factoring companies and those that offer invoice discounting may be the best way to get to the other side of your cash flow issues. There are plenty of advantages of spot factoring over borrowing money.
Look for a factoring facility that includes perks like non-recourse factoring, a free quote, and gets you the most value of the invoice possible.
Remember, every invoice factoring company isn’t the same, and you have other financing options that might work better for you. As long as you’re researching your choices and using your funds to improve your business, the factoring fees might be worth every penny.
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