Spot Factoring: What is it?
Spot factoring, also known as single invoice factoring is a way for recruitment businesses to ease their cash flow flexibly by selling a single invoice at a discount to an invoice finance services provider at a reduced cost – without having to enter into a long term relationship with that provider.
More traditional invoice discounting and invoice factoring arrangements are finance for recruitment solutions which require companies to factor a monthly or yearly amount, or at least factor with the chosen company on a regular basis. Spot factoring on the other hand, is a one-time transaction which allows you to have an advance on a single invoice, rather than committing to a long-term relationship.
How Does Spot Factoring Work?
With spot factoring, the finance company will set a minimum invoice account usually, as they are only guaranteed one transaction so it has to be worth their while. There is no upfront fee charged, however, as the financial services company realises that you need all of your working capital at this moment – which is why you are entering into an agreement with them.
Other than that, the process for spot factoring is similar to the usual invoice finance process:
- Your company completes an assignment and raises an invoice for the client (usually for spot factoring the invoices tend to be £50,000 and over)
- A copy of this invoice is then sent to the spot factoring agent
- The factoring agent reviews the invoice, verifies it and completes a credit check on the client (the debtor)
- A portion of the invoice (anywhere from 70% to 90%) is then advanced to your company
- The balance of the invoice is then held in reserve, and the spot factoring company will take their fee from this reserved balance
- Once the client has paid the invoice, the factoring company releases the remainder of the invoice (minus their fee)
Advantages of Spot Factoring
Using a spot factoring company means you can unlock funds that are tied up in an individual invoice, so that you can plough it straight back into your business without having to wait for the invoice to be settled by the client. If the invoice is on the large side, then this can prove to be a massive boost for your business meaning you can pay suppliers on time and keep up a good relationship with them, pay your payroll on time and keep your high-performing staff, and also have the cash to invest in a new project, new office or new service when you need it. Other advantages include:
- No long contracts so no minimum limits to adhere to and no ongoing fees to pay
- Quick access to cash (once the fees and rates has been agreed)
- Flexibility to access cash on your terms. You choice the invoice you want to submit for payment
- No setup fees. Most spot factoring companies will not charge a set-up fee for the service they provide
- No security is required other than the invoice itself
- You don’t need to have a fantastic credit rating. The provider is actually more interested in the credit rating of your customer.
Disadvantages of Spot Factoring
Spot factoring isn’t for everyone though. Some companies can charge a premium fee for the flexible service they offer and so you may end up paying more in fees than if you were in a longer-term relationship with the provider. Also, it can sometimes take a long time (over 7 days) to get your spot factoring contract set up, which means if you need the cash quickly you may want to consider another option. Also, some spot factoring companies insist that they be able to chase the end client for payment of the invoice, which can damage the relationship between your business and the client – not great if you want to cultivate friendly relationships! Other disadvantages include:
- It can be a slow process which takes a week or more to complete – although many companies will promise a 48 hour turnaround
- You lose control of your sales ledger as you have passed responsibility for the collection of the debt to the factoring company
Things to think about
If you are considering spot factoring, here are some things you need to keep in mind:
- Make sure you select your chosen service provider early on in the process, to make sure firstly that they are able to work with you but also to prevent invoice aging (which can create the risk that you may deter a company who actually would be a great fit for you)
- Ensure your books are neat and up to date as your chosen financial services provider will more than likely want to have a look at them and see if there is a record of payment trends. If you can prove that the client you want to spot factor the invoice for pays on time you may be able to expediate the factoring process, increase your approval amount and decrease your interest rate
- Make sure the invoice you have chosen to factor is ‘free and clear’ i.e that it is an available asset. If you have already promised your invoice to someone else as collateral then your factor provider will be less likely to agree to purchase it
- Always be honest. Spot factoring companies are used to working with start-ups and companies with poor credit histories so be up front with them from the start. The more open you are with your account manager, the easier it will be for them to troubleshoot any issues with you and this will ultimately mean you get your hands on your cash faster.
What type of company can it help?
The advantages that we have outlined above means that spot factoring is ideal for seasonal businesses which don’t need finance all year round but could benefit from it when month to month changes occur. It would also work well for a business that has taken on a large project or those businesses who only have one or two large debtors.
If you are interested in finding our more about spot factoring, or other finance options (such as a cash flow loan) then please get in touch with our team today.