Spot Factoring

Traditionally, accounts receivable factoring companies are granted a security interest in (lien upon) their clients’ accounts receivable in the form of a “blanket lien”. Generally, the client is required to notify ALL its clients/customers that the payment on their account has been assigned and is payable exclusively and solely to the factoring company. Factoring agreements often require the client factor all their eligible accounts and invoices, producing greater revenue for the factoring company, higher factoring costs for the client, and a greater level of security for the the factoring company. There is nothing wrong with this arrangement, provided it works for both parties—the client and the factoring company.

However, many clients do not have the need or desire to factor all their invoices or all their accounts. Factoring companies that permit their clients to select which accounts and which invoices to factor are called “spot factors”. Spot factoring has become more common since 2000, as the factoring accounts receivable became a widespread source of working capital for small businesses. Factoring companies began to see that there was a growing niche for a financial service that could be tapped “as needed, when needed” by small businesses seeking to generate temporary cash flow on a case-by-case basis.

Generally, spot factoring allows the client to determine which of their customer accounts they wish to assign to the factoring company. (Note: The term “assigned” as used in this article, is a legal term that the account debtor is on notice and is legally obligated to remit account proceeds to the factoring company). Once the account has been assigned to the factoring company, the client is free to factor as many or few invoices as desired, subject only to the factoring company’s rules of eligibility and other terms and conditions contained in the factoring agreement.

Occasionally, there may be confusion about the account debtor’s obligation to remit the proceeds of “non-factored” invoices to the factoring company. The general rule is that once an account debtor is put “on notice” of the assignment (unless the assignment says otherwise), the account debtor must remit ALL payments to the factoring company, regardless of whether or not the factoring company purchased or made an advance against the relative invoice(s). When and if the factoring company receives payment from an account debtor which relates to a “non-factored” invoices, it is incumbent upon the factoring company to account for the payment and either disburse it or give credit for it to the factoring client in accordance with the terms and conditions of the factoring agreement.

In most cases, when a factoring company obtains a payment for a “non-factored” invoice, the factoring company will either forward the payment to the client in the same form it was received, or in the event the factoring company employs a lock-box, a disbursement is made after the non-factored payment clears the maker’s bank.

Spot factoring differs from traditional factoring in the sense that the factoring company generally assumes a greater degree of non-payment risk. In a traditional factoring model, the factoring company generally has a greater amount of funds held in reserve, has a greater amount of collateral in the form of other assigned accounts, and has a steady stream of invoices being presented to it from the client. Accordingly the effective cost of traditional factoring may be lower than spot factoring.

Spot factoring, by contrast, leaves the factoring company with very little collateral—often just a single account. Also, because the client is in control of which accounts and which invoices are presented to the factoring company, the factoring company has to be especially careful to accept only the accounts in which the factoring company has a great deal of confidence. Same can be said of the individual invoices presented by the client to the factoring company. Spot factoring offers maximum flexibility for the small business, but typically at a slightly higher cost per invoice. In the end; however, spot factoring may be substantially LESS costly than traditional factoring, since the client is only paying for what it needs as opposed to paying a minimum monthly fee. Not all factoring companies offer spot factoring and not all traditional factoring companies require the payment of a “minimum monthly fee”, so it’s always best to compare factoring companies before signing a factoring agreement.

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