Many companies opt for spot factoring because it seems like such a simple way to get needed cash. Simply finance an invoice or two and the agreement is complete. Spot factoring is explained here, and readers will learn what it is, how it works, and why it’s risky in some situations.
Spot Factoring: What it Is
In spot factoring, the client only finances one invoice at a time. Some clients use this service on an as-needed basis, while others use it one time only. Regardless of the frequency with which a client uses the service, transactions are handled individually and with no expectation of future usage. This makes spot factoring an ideal way for businesses to handle one-time, urgent cash flow needs.
This is a kind of factoring that falls somewhere between spot and conventional factoring. It allows clients to choose which customers and invoices to factor. Selective factoring gives clients full control of financing, and companies that offer this service allow clients to decide when invoices are financed.
The Cost of Spot Factoring
The idea of spot factoring is that it’s used on a one-time basis. Therefore, the factor only has one transaction in which to recover working capital and due diligence costs and to turn a profit. Because costs and risks can’t be spread over many transactions, the cost is raised to make each transaction worthwhile.
Working With Larger Invoices
Factoring is based on volume, and profits are directly related to the amount each client finances. Spot factors expect to be hired on an as-needed basis and, because of this, they typically only accept larger invoices.
Effects on Client Relationships
In factoring relationships, clients receive a notice that invoices are financed and payment must be sent to a different address. Such notices aren’t usually a problem for selective or conventional factoring lines because there’s only one notice and changes are simple to make. However, with spot factoring, the client has to send another notice once the transaction is finished to tell the customer to send payments to the previous address. This can cause serious inconveniences to the customer’s accounts payable department.
While spot factoring has its disadvantages, it can be a viable solution for companies with one-time cash flow needs. By considering the pros and cons of spot factoring, companies can make an informed decision before they factor invoices.