Spot Factoring: Is Single Invoice Factoring Right For Your Business?
Invoice factoring is often cited as an ancient form of business financing, dated back to the time of ancient Mesopotamia. But while the basic concept may be old, it is not outdated; factoring structures are continually changing to stay relevant to the needs of modern business owners.
One new development, for example, is spot factoring. While this type of factoring has been around for a while, it has begun to gain prominence with alternative financing companies such as BlueVine (see our review).
Spot factoring tends to be more flexible than its more common and traditional counterpart: high-volume factoring. While many businesses may benefit from high-volume factoring, the flexibility of spot factoring opens up the industry to a more types of businesses.
What is spot factoring, and is it right for your business? Keep reading to find out!
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What Is Spot Factoring?
Spot factoring is an agreement in which you have complete control over which invoices you sell to a factoring company. Because you can sell as few as one invoice, and you sell invoices on an invoice-by-invoice basis, this type of factoring is also called “single invoice factoring.”
For comparison’s sake, high volume invoice factoring (the more common type of factoring, also called “contract factoring”) requires that you factor all or most of your invoices, and that you sign a long-term contract.
High volume factoring is beneficial to the right type of business, and is generally accompanied by a lot of perks that are not enjoyed by merchants who choose to spot factor. Nonetheless, spot factoring comes with perks of its own for the right type of business.
In the next section, we’ll explore the differences between the two types of factoring.
Spot Factoring vs. High Volume Factoring
Spot factoring differs from high-volume factoring in a few ways. In general, you can expect recourse services and higher factoring fees but fewer additional fees and no long term contracts.
No Long-Term Contracts or Monthly Minimums
Perhaps the most obvious difference between high-volume factoring and spot factoring is the latter does not require long-term contracts.
As you’ll see below, high volume factors typically structure their rates and fees differently than spot factoring, because of the expectation that the business is factoring a certain amount and will continue to do so for a certain amount of time. On the other hand, because you have complete control over when you choose to sell an invoice in a spot factoring agreement, the factor does not have the same expectations or fee structure, and long-term contracts aren’t necessary.
Higher Factoring Fees But Fewer Additional Fees
The most obvious reason spot factoring tends to carry higher rates is because it is more risky than its high volume counterpart. While high volume invoice factors have the time to understand your business and customers and service multiple transactions, spot factors may spend the same amount of time vetting your clients and calculating risk for fewer transactions. The extra work will be reflected in the price.
Furthermore, as mentioned above, factoring with a long-term contract is structured differently than factoring without. Long-term contracts tend to carry lower discount rates (the fee for selling an invoice), but they may charge more incidental or scheduled fees, such as monthly maintenance fees, servicing fees, monthly minimum fees, credit check fees or, of course, early termination fees. On the other hand, spot factors tend to roll additional fees into their discount rates, so you won’t have to pay extra fees, but your discount rate will be higher.
Note, however, that spot factors may still include fees; the most common include wire and ACH fees, startup fees, and overdue fees.
Regardless of whether you choose high volume factoring or spot factoring, you will have the opportunity for lower rates and fees the longer you stay with a factor and it gets to know your business and your clients.
Typically (But Not Always) Recourse
Non-recourse factoring means that, in the event that your customer goes bankrupt, you do not have to re-purchase the invoices from the bankrupted company. Although more desirable, non-recourse factoring is very rare—doubly so if you’re interested in spot factoring.
Most spot factor agreements you come across will be recourse agreements; in other words, you will be responsible for re-purchasing the invoice if your customer does not pay, regardless of the reason. While non-recourse factoring is rare with high-volume factoring as well, businesses may have an easier time finding a non-recourse high-volume factor.
Is Spot Factoring Right For You?
Would your business benefit more from a spot factoring arrangement or a high-volume factoring agreement? To determine which would be a better fit, ask the following questions:
How much control do I want over my invoices?
Do you want to simply sell all of your invoices and be done with it? Or do you want to be able to pick and choose which invoices you sell to a factoring company? Naturally, those who want to sell all their invoices should find a high-volume factor, while those who want more control may want to seek out a factor without monthly minimums.
How many invoices do I need to factor?
Do slow-paying customers frequently interrupt your cash flow? Or do you only occasionally run into problems caused by payment issues? If you answered ‘yes’ to the former, you may want to seek out a more traditional factoring arrangement.
Do I want to sign a long-term contract?
Factoring agreements may require no formal contracts at all, may offer month-to-month contracts, or may offer contracts that last up to 18-months. Are you prepared to sign a long-term contract, or do you want the flexibility to discontinue services if needed?
Be aware that, even if a factor does not make you sign a long-term contract, most require that you give a month or two’s notice so the company can wrap up invoice collection and other services.
Do my invoices have a lien placed on them?
Most invoice factors will insist that they hold the first position on your receivables, which means they can claim your invoices to recoup money should you somehow break the factoring agreement. Spot factors are especially unlikely to bother negotiating for first position rights if somebody else already has claim to them, given that you may not give the factor very much business.
However, if your invoices are encumbered but you want a spot factoring agreement, it doesn’t hurt to shop around; some factors may still be willing to negotiate for the rights.
Alternatives To Spot Factoring
You may find that spot factoring, or even high-volume factoring, is not for you. If that’s the case, you may find one of the following options work better for your business:
Invoice financing is very similar to invoice factoring, but your invoices are simply used as collateral for a loan; you do not have to sell your unpaid invoices. Although invoice financing can take many forms, it tends to be much more flexible than high volume factoring.
For example, Fundbox (see our review) — an invoice financing company founded in 2013 — offers invoice-backed loans to small businesses. Like factoring, your borrowing amount is based on the value of your unpaid invoices. However, you repay by making weekly fixed payments for a set period of time. True to the type of financing, you do not have to sign a long-term contract or pay additional fees to use the service.
A/R Backed Line of Credit
An A/R backed line of credit may appeal to merchants seeking as much flexibility as possible. Often touted as a modern day version of invoice factoring, A/R backed lines of credit combine the security of invoice factoring with the flexibility of a line of credit.
As you might expect, an A/R backed line of credit (sometimes also called an “asset-backed line of credit”) is a line of credit in which unpaid invoices are used as collateral. Generally, merchants are not able to borrow more than the current value of their unpaid invoices. However, as borrowing amounts are not tied to specific invoices, you don’t need to worry about the size or age of your invoices when deciding how much you need to borrow.
Despite the flexibility on offer here, be aware that, like most loans, A/R backed lines of credit may still carry fees (such as unused line fees or termination fees); if so, you may be required to borrow a certain amount of money or use the service long term.
Revolving Lines of Credit
If you do not like or aren’t qualified for the A/R backed lines of credit available to you but need an extra source of capital to resolve cash flow problems, a line of credit that is not tied to your invoices may be what you’re looking for.
Merchants with a revolving line of credit have access to a credit facility (that does not correspond to their unpaid invoices) and can draw up to their limit at any given time. The business only has to pay interest on the amount it borrows, and the credit line replenishes as you repay your loan.
Standard revolving lines of credit are available from a number of sources. The collateral required will vary depending on the lending institution. In general, the more collateral required, the lower the rates and fees will be. Those that require specific collateral will be less expensive than those that require non-specific collateral (such as a blanket lien) or no collateral at all.
If you’re interested in this type of financing, check out our Business Line of Credit review category.
Online Business Installment Loans
If you are having trouble getting financing based on the value of your invoices and you have no other specific collateral, you may want to turn to online installment loans. Online business loans are typically easy to apply for, quick to be funded, and (perhaps most importantly) do not require any specific collateral.
Installment loans can be used for cash flow and working capital purposes, but can also be used for long-term projects such as business expansion.
However, because online installment loans do not require collateral, they are more difficult to get if your business is not perceived as creditworthy. You’ll have to have been in business at least a year and have fair credit to qualify for a loan.
For more information on online installment loans, check out our Small Business Loans review category.
Spot factoring is a convenient and flexible service that will appeal to many types of businesses. Although it tends to be a little more expensive than its high-volume counterpart, businesses that wouldn’t otherwise be good candidates for factoring services can use spot factoring to maintain workable cash flow.
Many invoice factors have begun to understand the value of spot factoring, so this type of factoring is easier than ever to find. Are you ready to start looking for a invoice factor to partner with your business? Get started by looking at a comparison of some of our favorite invoice factoring services or check out our full list of invoice factoring reviews.