Now more than ever, today’s invoice factoring companies offer a variety of options for clients, including spot factoring and special spot factoring rates. Spot factoring has become more common since 2000, as factoring accounts receivable became a more common source of working capital for small and medium-sized 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.
Sometimes called “single client factoring” or “invoice factoring,” spot factoring is a one-off, one-time factoring transaction where you receive an advance on a specific invoice as opposed to committing to an ongoing factoring agreement for multiple invoices. In some situations, some businesses can benefit from single client factoring or one-time factoring assistance. While you may find very few spot factoring companies that only work with single client factoring, some large full-service factoring companies will offer spot factoring as one option.
Through spot factoring programs, business owners in urgent need of quick working capital can receive funds on a single invoice without initiating a long-term relationship with a factoring partner. However, if you anticipate the need for seasonal or occasional spot factoring, you can save time when you need it the most by doing your homework. Start by identifying the best funding partner for your company before funds are needed to expedite your funding. Get to know a potential factoring company’s requirements and documentation needs so you’ll be ready.
Traditional Factoring and Spot Factoring
Traditionally, accounts receivable factoring companies are granted a security interest in (or lien upon) their clients’ accounts receivable in the form of a “blanket lien.” Generally, the factoring company’s client is required to notify all of its customers that the payment on their account has been assigned and is payable exclusively and solely to the factoring company. Some companies’ factoring agreements require their clients to factor all their eligible accounts and invoices; other companies offer some flexibility. 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. Spot factoring allows a client to determine the customer accounts they wish to assign to the factoring company. Factoring companies can permit their clients to select which accounts and which invoices to factor on a regular basis. If the factoring company buys only one invoice from a client one time or irregularly when a client has an immediate financial need, that arrangement qualifies as spot factoring.
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 typically 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 submitted from the client. Accordingly, the effective cost of traditional factoring may be lower than spot factoring.
Spot factoring or single client 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. The factoring company will conduct a thorough credit analysis of their client’s customer before proceeding to be confident in the customer’s creditworthiness and ability to pay their bill.
The same cautions can apply to some selective factoring situations and to individual invoices submitted 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. On the other hand, spot factoring may be substantially less costly than traditional factoring in some cases, since the client is only paying for what it needs as opposed to factoring all invoices and paying factoring fees that they don’t need to accrue or having to meet a minimum factoring amount.
Factoring companies are looking for clients with accounts that are creditworthy and show a history of on-time payment. Those accounts can be eligible for higher advances and lower factoring percentage rates. However, reliable factoring companies also frequently work with clients and customers with less than perfect credit records. If the invoices that you would like to submit for one-time factoring are not committed as collateral to someone else – if they are free and clear, then you could still be a good candidate for spot factoring regardless of customers’ past payment histories.
Not all factoring companies offer spot factoring and not all traditional factoring companies require the payment of a “minimum monthly fee” or maintaining a monthly minimum in submitted invoices. It’s always best to compare factoring companies before signing a factoring agreement.
Selective factoring is slightly different from spot factoring; it fits somewhere between traditional factoring and spot factoring. Instead of choosing a single account or invoice to finance, selective factoring gives you the ability to “cherry-pick” multiple customers whose invoices you would want to factor. If you have a cash flow problem due to a single slow-paying client, then spot factoring would be a good solution for you. Many businesses don’t have large cash reserves. Those businesses often have cash flow issues when they have multiple slow-paying clients and long waiting periods between issuing invoices and receiving payments. In this case, selective factoring would work well for your business.
Who uses spot factoring?
As a full-service factoring company, Interstate Capital offers spot factoring and competitive spot factoring rates to clients across a wide range of industries. Typically, these spot factoring services are offered to companies with seasonal cash flow needs and to companies that have the potential for continued spot factoring needs. Startups may seek spot factoring for a quick cash infusion. Some spot factoring clients only need funds on selected single client invoices during certain months of the year; others will contact their Interstate Capital’s factoring specialist periodically on an as-needed basis.
Since 1993, Interstate Capital has helped more than 10,000 small and medium-sized businesses across many industries speed up their cash flow and increase their profitability. By developing ongoing relationships and learning more about individual business owners’ challenges and opportunities, Interstate Capital staff members tailor customized factoring programs for clients that will help them build their business for the long haul.