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What is Spot Factoring, or Single Invoice Factoring and How Does it Work in the UK?

Spot factoring, sometimes called single invoice factoring, refers to a form of accounts receivable finance where a business sells a specific invoice to a third party (factor) for a percentage of the total value, to support cash-flow.

It’s a type of short-term business loan facilitating cash-flow that is best suited for SME’s with an established client base and a low level of invoice disputes.

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What is the Spot Factoring Process?

The process with this type of funding is relatively quick and simple:

  • The business agrees on rates with a factoring company. 
  • The business then chooses an invoice to raise funds against. This will typically be a relatively large invoice of upwards of £25,000.
  • The factor will verify the invoice (i.e. make sure it is not fraudulent) and then advance the agreed percentage to the borrower (generally 75-85%).

Advantages of Spot Factoring

There are a wide range of benefits for qualifying businesses. Some of these include:

  • No long contracts – Single invoice factoring allows you to access cash on your own terms without entering into a long contract. That means no minimum limits and no ongoing fees.
  • Quick access to cash – Once the rates and fees have been agreed, cash can be released by the factor extremely quickly.
  • Flexibility to access cash on your terms – You get to choose what invoices to factor and when to submit them for payment.  
  • Access to a large amount of cash – You can give your business a significant cash flow boost to invest in new projects, run payroll and grow your business.
  • No setup fees – Many spot factors will not charge a setup fee for the service they provide.
  • Low-risk – The process is relatively low-risk. The factor advances the money based on work already completed and you gain access to working capital without taking on a debt.
  • No security is required – Many spot factoring providers will not ask for any security other than the invoice itself.  
  • You don’t need an impeccable credit rating – The factor is more interested in the creditworthiness of your customer so it doesn’t matter if you have adverse events on your credit record.  
  • Not much paperwork to complete – The process can be completed quickly so you can concentrate on growing your business.
  • The factor will collect the debt – The spot factor will credit check the customer and collect the payment so you don’t have to worry about this time-consuming task.

Disadvantages of Spot Factoring

  • Can be slow – Although many providers promise 48 hours, completing a single invoice factoring contract within this time can be challenging. It may take a week or more to realistically convert your invoice into working capital.
  • Loss of control – What differentiates factoring from invoice discounting is the fact that the lender assumes responsibility for collection of the debt, meaning the company effectively loses control of its sales ledger.
  • May impact customer relationships – since a third party will now be chasing them for their invoice, highlighting your use of invoice finance.

What Type of Businesses can Spot Factoring Help?

The advantages associated with spot factoring make it perfectly suited to specific types of business. For example, seasonal businesses that don’t need finance all year round but have variations in sales from month to month can benefit. Businesses that take on large projects that take time are also well suited to this type of agreement, as are those that have just one or two large debtors.

Is it Right for Your Business?

If your business completes business-to-business (B2B) or business-to-government (B2G) work, carries out relatively large-scale projects, doesn’t require a constant source of working capital and only has a few customers, this type of funding could be ideal for you.

In this case, it will provide a quick and reliable way to obtain cash advances on your invoices and allow you to inject significant amounts of cash flow into your business, without taking on more debt. It’s also important that your customers are creditworthy and have a reputation for paying on time.  

Why Would a Company Choose Spot Factoring Over a Longer-term Contract?

Here are a couple of reasons why businesses may choose to finance a single invoice, over a longer-term contract:

  • Longer term contracts come with minimum annual fees which can be avoided with spot factoring
  • With company’s whose working capital requirements vary widely, cash-flow shortages may only become pronounced during certain periods.
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