If you’re reading this article then you’re probably aware of invoice finance as a form of business funding and know that invoice discounting and invoice factoring are the two types of invoice finance available.

But within invoice factoring, you have two options, either a whole turnover or a spot factoring facility.  

What is a Whole Turnover Facility?

In a whole turnover invoice factoring facility, you send the finance provider all your invoices for each customer, usually on a regular weekly cycle. In effect, you sell your entire sales ledger to the finance provider. It then advances you payment (up to 95 percent of the invoice amount) against all the invoices. The factor is then responsible for collecting the payment from the customer and paying you the balance of the invoice, minus their fee.

What is Spot Factoring?

Spot factoring gives you a greater degree of control over the arrangement, as it allows you to choose which single or batch of invoices you factor. This ability to access cash on an ad hoc basis is well-suited to businesses that want to raise short-term cash now and again, but don’t consistently want to dent their profit margins by paying the finance provider’s fee on every invoice.

How Does Spot Factoring Work?

  1. The first step is for the business to set up a new facility with a spot factoring firm. A number of options exist at this stage, so it’s important you speak to a number of finance providers to get a deal that suits you.
  2. You can then start assigning invoices to the spot factoring provider.
  3. The funder will verify each invoice and provide instant underwriting or work on an auction system to secure the best rates.
  4. An advance payment worth up to 95 percent of the invoice’s value is made available.
  5. When the invoice is due, the finance provider will use its own credit management process to contact the customer and ensure the invoice is paid on time.
  6. The customer pays the invoice into an account set up by the finance provider.
  7. The spot factor pays you the balance of the invoice, minus the agreed fee.

So, in practice…

  • You issue an invoice of £1,000 to the customer;
  • You send this invoice to the finance provider;
  • It makes £900 available to your business up front (based on an advance rate of 90 percent);
  • The customer pays the invoice;
  • The spot factor takes its fee of £50 and pays you the remaining £50.

When be Might Spot Factoring Used?

Every business has its own reasons for choosing to use spot factoring. For example, if a business is expecting a large order or looking to provide a product or service on extended credit terms, it may use a spot factoring facility to reduce the cash-flow pressure and support the increased activity. Other common reasons businesses choose to use a spot factoring facility include:

  • To pay for the expenses associated with rapid growth (payroll, staffing, new equipment, increase in production etc.);
  • To cover the increased production costs associated with seasonal businesses or an unexpected increase in demand;
  • To take advantage of new business opportunities;
  • To cover the working capital or operational expenses related to a slow quarter;
  • To bridge the cash-flow gaps resulting from late payments from customers.

What are the Benefits of Spot Factoring?

  • It gives businesses a quick injection of cash as and when is it needed;
  • You only pay when the service is used;
  • There’s no long-term commitment;
  • The business incurs no additional debt;
  • No interest costs are generated through this process;
  • No business or personal assets are required as security apart from the invoice itself;
  • It can work in conjunction with other facilities, such as business loans and overdrafts, which are already in place;
  • Start-up businesses can access funds when they might not be able to do so through other means.

The Disadvantages of Spot Factoring

As with any method of business funding, there also some disadvantages to consider:

  • The cost of a spot factoring facility has a higher per invoice cost than a whole turnover agreement;
  • Factoring is a disclosed transaction so customers will be notified every time you choose to raise finance against an invoice;
  • Some businesses prefer to handle their own credit control so they can maintain friendly customer relationships.  

How to Choose a Spot Factoring Provider

Once you’ve decided spot factoring is right for your business, you need to find a provider that will be a good fit for you. To do this you need to ask questions:

  • What proportion of the invoice will you receive as an advance?
  • What will the service cost?
  • Will you be required to factor a certain number of invoices?
  • Does the factor have experience working with other companies in your industry?
  • Who will be working on your account?
  • How will they communicate with your customers?
  • Do you have anyone who can recommend a factoring provider to you?

Overall, spot factoring can be a very useful funding option for businesses of every size. However, it’s important to consider your options carefully and do plenty of research when searching for the right factor for you.