Spot factoring, also known as single-invoice factoring, is when a business sells an individual customer invoice to a lender to receive advance funding. The factoring relationship typically ends as soon as the debtor pays the invoice. It’s best for businesses that prefer flexibility because their invoices or factoring needs are less predictable.
How Spot Factoring Works
Just like in invoice factoring, a business intending to spot-factor a single invoice will first submit it to a factor for approval. Once the factor approves the invoice and determines the creditworthiness of the debtor, it will then advance a percentage of the total value of the invoice―typically between 70-90%―holding the rest in reserve. After the factor can collect on the invoice, it will then remit the balance to the business, minus the factoring fee.
Who Spot Factoring Is Best For
Spot factoring is ideal for a business that has a single, large invoice that it wants to be funded, but would rather not commit to a long-term factoring relationship. Smaller companies that are factoring government invoices for a major contract or completing an individual construction job should look for a spot factoring solution.
Spot Factoring Example
A small business that works with multiple buyers may invoice them with terms of 90 days. This business may run into occasional cash flow shortages, especially during peak season when order volume is high, but customers are taking longer to make payments. During this season spot factoring may be the best solution since factoring all invoices would result in unnecessary costs. However, to get a spot factoring contract the business would need to demonstrate that its debtors are reliable and the business will likely have to pay an ongoing fee to keep the factoring facility open.
Pros and Cons of Spot Factoring
Spot factoring can give a business an immediate cash boost without requiring it to commit to a long-term factoring relationship. It also doesn’t prevent a business from getting other forms of financing so that it can work with other working capital solutions.
One downside to spot factoring, as opposed to invoice factoring in general, is that it’s typically more expensive, given that it’s a one-time transaction. This means that, unlike in normal invoice factoring, a factor cannot spread the risk over multiple transactions, and so will charge a higher fee to make an individual transaction worthwhile. Spot factoring companies also will usually require a larger invoice size to approve a transaction.
Alternatives to Spot Factoring
One alternative to spot factoring is selective factoring, which works similarly to conventional factoring except that it gives more control to the seller in terms of which invoices to factor and when. Business owners also can use invoice financing, which essentially lets a business collateralize an invoice without selling it directly.
Spot factoring, the one-time selling of an invoice to a factor, is a great way for a business to get immediate funding. There are, however, a few downsides, not least of which is that it is typically more expensive than other factoring services. But for businesses that want a quick cash boost that precludes all the trappings of a long-term factoring relationship, spot factoring can be the ideal solution.