Spot factoring {sometimes called ‘selective invoice discounting’ (SID)} refers to a business selling a specific invoice to a third party, for a percentage of the amount. 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.

Spot or Single Invoice FactoringWhy would a Company Choose Spot Factoring 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.

What is the Spot Finance Process?

  • A company agrees on rates with a factoring company and signs over an invoice to them
  • The factor will verify the invoice (i.e. make sure they’re not fraudulent) and then advance the agreed percentage to the borrower (generally 75-85%)
  • Within the agreed timeframes of the invoice, the factoring company will collect the debt and, after subtracting their fees, make the remaining balance available to the borrower.

Advantages of Spot Factoring

Improves the cash flow cycle relatively quickly, helping a business fulfil its business requirements, i.e. payroll, or ongoing production costs

Can be an option for businesses without a perfect credit history, for whom traditional finance is not an option.

Disadvantages of Spot Factoring

  • Can be Slow – Although many providers promise 48 hours, completing a spot factoring contract within this time is tricky. 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.

How does Single Invoice Factoring Work?

The process is similar to that of normal factoring: the company agrees terms with the lending provider and then assigns an invoice (usually a significant sum, 50,000 or more) to the lender. A percentage is then advanced and, when the invoice period is up, the factor collects the invoice. The balance is then paid to the borrower, minus any fees which may be due.