Spot Factoring, Its Uses and Why It Works

spot-factoringSpot factoring may sound new to most ears especially if you’re not in the filed of business but this tried and tested method has long been praised for its ability to raise needed financing without the usual struggles brought about by other alternatives in the market.

By definition, it refers to a type of funding method that allows business entities to derive their needed cash from a carefully chosen trade receivable or customer invoice. The name spot pertains to the singular transaction as only one invoice will be subjected to the arrangement. It works under the premise that while a receivable is essentially an asset, it locks up cash for a significant period of time making them unavailable for immediate use until its maturity and after collection from the owing customer.

Moreover, it involves the sale of an asset. In this case, that would be the invoice. The business, in exchange for the advance of around 80% to 95% of the total value, shall sell to the financial institution the rights to collection with the remaining balance to be received less fees after full payment collection has been achieved by the said provider at maturity date.

Spot factoring can be used in many situations. For one, there’s emergency or immediate expenditures. Since this type of funding is easy to acquire with less paperwork needed and even a 24 hours processing to cash out time, it’s perfect for when one needs resources fast. An example is when vendors and suppliers have to be paid but cash is a little short or for opportunities that have not been forecasted but would prove extremely beneficial if taken. It can also be utilized for the usual needs and operations as it releases the cash from the invoices and thereby strengthens working capital and liquidity in the process.

That said, it is also used to significantly improve cash flows making it a good method to use for entities whose outflows tower over its inflows. This helps create a better receivables turnover as it helps in decreasing receivables and increasing cash at the same time with no effect on liabilities because it isn’t one. This means it only comes with a onetime fixed fee, no interests or collateral requirements and will not in any way affect the entity’s credit score and history. This makes spot factoring available not only to established businesses but also to startups and small to medium scale enterprises. Even recovering entities!

Advantages of an Export Overdraft

Transportation processAn export overdraft refers to a financial arrangement that allows exporters to advance the value of their sales invoices to hasten their collection and thereby receive cash prior to their maturity. This of course comes with a fee but one that’s free of debts making it a favorite option among entities of varying industries and sizes.

Using export overdraft has proven monumental if not successful for many and that’s thanks to its various benefits and advantages. Today, we’ll dig a little deeper through each one and find out why this method is the cool kid on the block.

It’s predominantly and significantly quicker compared to other options. Where other financing methods take weeks or even months to process and approve, an export overdraft takes as little as a few day’s time with some providers able to hasten it up to 24 hours.

It’s non-discriminatory in terms of credit score or entity size. Majority of financing options in the market require companies to have adequate asset-based collateral and a strong credit score. This can be particularly tricky for small to medium scale enterprises, startups and recovering businesses. But because an export overdraft is a type of receivables-based financing where the sales invoice is used to derive the needed resources, the company’s credit score or size isn’t the deciding factor. Instead, the creditworthiness of the customer to whom the invoice is attached to shall be the final judge.

It hastens collections and cash receipts. Exporting adds a financial strain to business as it demands more funds for the additional production and labor hours. Additionally, majority of importers choose to defer their payment until goods have been received or resold creating receivables. Although not exactly a bad thing, receivables lock up cash within invoices, holding them up until maturity which can be a threat to liquidity for prolonged periods of time and when in bulk. Because of the way an export overdraft is designed, it allows exporters to expedite their receipt of cash through the advance thereby tying up sales and cash inflows, improving liquidity, and strengthening working capital.

It comes free of liabilities, interests and collateral. An export overdraft arrangement is no liability because it is not one. As an asset transaction, it merely sells the rights (as well as transfers the burden) of collection to the provider for an agreed upon fixed fee or percentage of the total invoice value.

Things People Confuse About Invoice Finance

invoiceJust because something’s famous doesn’t mean it’s completely and wholly understood. Take invoice finance for example. This receivables financing method has been in popular use for decades and yet people still find something to confuse about it. Sad, we know but we’re here to help end that or at least lessen it for the mean time with better information and myth busting. Are you ready? Because we sure are.

#1: Is it a loan?

No it is not. Invoice finance may be a funding method but it is an asset transaction. In other words, it creates zero liability because it isn’t classified as one to begin with. When utilized, it decreases trade receivables, increases cash and debits an expense account for the service fee. Additionally, it does not come with interest or an asset-based collateral requirement. Using it will not affect the entity’s credit score and it will even help the financial reports look more attractive as it aids in liquidity.

#2: What happens to my receivables?

Invoice finance involves the sale of the rights to collect against a customer invoice/s in exchange for a cash advance on their value. This means that the collection function including its costs and burdens , at least as pertains to the invoices subjected to the financing arrangement, shall be transferred to the provider or the financial institution. The receivable shall remain to be under the business’ name and control but the burden to collecting them shall be shifted.

#3: Do I risk customer relationship?

No considering that you choose trustworthy and quality invoice finance companies and providers. Make sure to inquire, research and read about them thoroughly first to identify who can indeed deliver. Businesses may also opt for a confidential arrangement where customers are not made aware of transaction between business and financier.

#4: Is it expensive?

Not at all. The fee involved can either be on a per period basis or a onetime thing depending on the specific type of invoice finance chose. Regardless, this is significantly cheaper compared to other financing methods because it is fixed and comes free of any interests.

#5: Can all businesses use it?

Another great thing about invoice finance is that it can be obtained by all businesses regardless of type, industry, size or length in the market. Even startups, small to medium scale enterprises and recovering entities can use it. After all, the cash is derived from a receivable and not a borrowing.

What it Means to Use Single Invoice Discounting

invoice discountingWhen asked about the trickiest ball to juggle in business, most entrepreneurs would agree on financing. It’s a sensitive topic and one that’s also highly debated. After all, there isn’t a one-size fits all solution when we talk money matters. But if there’s one that has risen in use and popularity over the past years, that would be single invoice discounting. So what’s the catch?

Single invoice discounting represents a category in receivables financing that allows businesses to advance the value of a specifically chosen customer invoice thereby receiving its monetary value prior to its maturity.

What happens is the company chooses an invoice of significant value and one that fits the requirements of a pressing or urgent expense. It shall then be used as a security for the advance. The procedure takes fairly quickly with majority of providers able to release cash in a matter of only twenty-four hours. Upon receipt of the cash, the company uses it as it sees fit. Once it matures and collection has been completed, it then goes on to pay the provider for the advance taken plus a fixed predetermined fee.

The great thing about single invoice discounting is that it’s a zero liability mode of financing. This means that it comes with zero interests and there are no asset-based collateral requirements. Not surprising as the method is known to be an asset transaction. It doesn’t categorize as a debt, credit or borrowing. Instead, it is recognized as an increase in cash coupled by a decrease in trade receivables and a debit to an expense account to record the onetime fee.

Speaking of which, the fee to be paid to the provider is equivalent to a small percentage of the total invoice value which can oftentimes be around 5% or less depending on the agreement. It is also a onetime fee since single invoice discounting is a onetime transaction and does not involve lengthy contracts.

Many entrepreneurs favor the method because apart from being a zero debt option, it helps improve liquidity by freeing locked up cash within invoices. It even hastens collections, betters cash flows and strengthens working capital which is great for any business. We all know that money is the lifeblood of any organization and without it operations would not run and push through. Moreover, single invoice discounting allows businesses to better tie up their actual cash to their level of sales.

When Spot Factoring Can Help Businesses

avoiddebtBusiness can indeed lead to success and with that comes sales, profitability and the fine things in life. But with gain, comes pain, as they say, or at least challenges that need to be worked around. Financing is perhaps one of the more demanding and tricky aspects of any entrepreneurial venture. Money is always a sensitive topic and it’s one that requires a great degree of care and caution. Owners need to identify methods that satisfy their needs and those that will fit certain scenarios. Then enters spot factoring.

Known as a type of funding that falls under the receivables financing category, spot factoring makes use of a specifically chosen sales receivable as a means from which cash is advanced. In exchange for the right to collect against it, the business shall receive its value prior to its maturity or in other words receives cash from a provider who in turn shall gain the rights and the responsibility to collect from the owing customer.

But when is factoring necessary? What instances does it help businesses most? We give you a rundown.

  • Collection Haste

When businesses want to hasten the collection and cash realization for a specific invoice, say because of its significant value which can be used for a particular venture or project, the method becomes the perfect solution.

  • Emergency Situations

Because it’s relatively quick to process and most providers can release cash in a matter of twenty-four hours, single invoice factoring is also a great alternative to consider when in need of funds for emergency and immediate disbursements.

  • Liquidity Setbacks

Since receivables have a way of locking up cash within invoices for prolonged periods or up to their maturities, this can take its toll in terms of liquidity or the state of having enough assets that can readily be turned to and/or used as cash. Because it is relatively quick and turns receivables to currency prior to their maturity, the method helps improve liquidity and working capital in the process.

  • Debt Avoidance

Spot factoring is no loan. Despite being a financing option, it creates no amount of liabilities and interest. It doesn’t even come with nor require any form of collateral. In the company’s books, it is reflected as a decrease in receivables coupled by an increase in cash and an increase to an expense that pertains to the fee apid to the provider.

Kinds of Export Funding

export fundingInternational trade is no doubt part of any entrepreneur’s long term goal. It spells bigger markets, more sales, risk diversification and asset maximization to name a few. But benefits aside, it also comes with its own set of challenges one of which includes export funding.

It’s true that resources, a lot to be exact, are necessary when venturing into the global market. With factors like shipment, customs, tarriffs, taxes and added administrative and operational costs, business owners need to identify their needs and trace which export funding options will suit each one best. To help with such endeavor, we’ve listed down some of the most apt and effective options. Read on and discover what they are.

1. Bank Loan

Bank loans involve significant and huge sums borrowed from a bank or similar financing institution. A long term type of credit, it often spans from five to twenty years and sometimes even more. It has a stipulated maturity and is to be repaid on set intervals over the course of the period with interest. Because of its size and length, it requires property collateral and involves scrupulous and meticulous application.

2. Mortgage

This is somehow similar to bank loans in terms of length, payment terms and amount. The difference lies in the fact that where bank loans can be used for whatever venture, a mortgage is specifically taken out to purchase real estate properties.

3. Bridging Loan

Unlike the first two, a bridging loan is a temporary and short term financing. It is a type of interim financing thereby one taken out to fulfill and provide for immediate short term liquidity needs pending the approval and/or availability of a permanent and bigger funding source such as a mortgage, bank loan, sale proceeds, income or the like. It is most popularly utilized to provide for down payments and other immediate expenses.

4. Receivables Financing

This makes use of a company’s receivables or sales invoices to draw cash. It works by advancing the value of the invoices before their scheduled maturity date in exchange for a fee which is often a minimal percentage of the total receivable value. Receivables financing has two main types namely factoring and discounting.

5. Merchant Cash Advance

This last type of export funding option is one that makes use of credit card sales. It allows businesses to borrow a certain sum with the payment as a percentage of every month’s total credit card sales. What make this a great method is that the level o payments is directly proportional to credit card sales thereby allowing the business to pay only up to what it can afford to.

Export Funding

On this page, you will learn more on export funds.

Financial Startup Mistakes

startupThey say that entrepreneurship is a rewarding thing. That’s true. But let us not forget that the path to its success is a long and winding road. There is so much to do and learn and you have to be prepared to win otherwise expect to lose and then face the consequences that come with it. One of the aspects that have to be given attention to has to be the finances. This is a sensitive topic that oftentimes catches startup business owners on guard. Today let’s get to know some of the most common financial startup mistakes with the help of the team at WCP.

Financial Startup Mistake #1 – Investing too much on aesthetics is a huge blunder for startups. Sure, you need the best furniture and equipment but also don’t forget that you have a budget to work with. At this stage, you have to put function above all and if you don’t need it then don’t buy it.

Financial Startup Mistake #2 – Lacking in the resource department comes second in our list. Before you begin your venture, you must make sure that you have the resources to keep it alive. It’s not just about starting it. You also have to maintain and improve it.

Financial Startup Mistake #3 – Next comes a very fatal culprit which is credit. There’s nothing really wrong about debts to begin with. It’s the manner and reason by which they are used that makes it a hit or a miss. One must never rely heavily on liabilities to run a business. At the same time, all forms of credit taken must be carefully decided on and these have to be debt that the company is surely capable of repaying in the near future.

Financial Startup Mistake #4 – Many startups often forget about the ongoing or hidden costs to a business. There is more to it than meets the eye. Things like maintenance and repairs of a building, loss due to calamities and the like must be accounted for.

Financial Startup Mistake #5 – Lastly, many entrepreneurs begin with no finance professionals or accountants to manage its financial transactions and needs. Many try to wing it on their own and do their books without the help of an expert. It may seem cost efficient at first but it won’t be in the long run. Not only does it eat up your time and energy but you are likely putting yourself at high risks of errors.

Cash Flow Mistakes and How Single Invoice Finance Can Help

cash flowA company’s cash flow is crucial because it depicts the actual inflow and outflow of cash and is thereby a great indicator of liquidity. Accounting-wise, it’s one that needs to be kept an eye on because sales does not exactly equate to profits or let alone currency. Remember sales on credit? Good thing we have Single Invoice Finance in the form of factoring and discounting.

The financing options have proven to be very useful to help business entities with their liquidity issues as well as to help them raise capital without having to go for a debt. As much as these methods are often used for emergency purposes, they are also a good solution to help ease the pain as resulted by these cash flow mistakes.

  • Lack of an Emergency Fund – Lastly, a cushion or emergency fund should always be present. This emergency cash allocation that is to be used in dire situations such as when liquid funds are not available due to certain factors and scenarios becomes useful as the need arises. This safety net can be a company’s saving grace.
  • Lenient Credit Terms – It is important that you take a good look at the terms and conditions set out to customers who purchase on credit. They need to be strict but reasonable, clear and specific. Moreover, it is a must to assess their credit score before extending the transaction.
  • Long Outstanding Receivables – Accounts receivables are not bad per se but if they become long outstanding then they cease to be quite the promising asset they were supposed to be. Long outstanding accounts mean that they have gone past their maturity. They remained uncollected and therefore useless and illiquid. Overtime they can even be written off as bad debts and therefore losses.
  • Mismanaged Accounting – To better gauge and assess one’s cash flows, proper accounting of all transactions are a requisite. There has to be a system set in place to raise red flags when disadvantageous circumstances arise. Accuracy and timeliness are also crucial here. If records are erroneous or are not recorded and made available in time then all efforts will remain in vain.
  • Overestimated Sales Volume – There is nothing wrong about optimism in business but everything has to be set on a realistic scale. Sales won’t triple in a month by some miracle. If one overestimates and makes use of unrealistic basis then there’s the risk of spending more thinking that demand is on a high.

Single Invoice Finance can do so much as to ease a liquidity and cash flow issue but it’s still best to avoid the aforementioned mistakes at all costs.

The Benefits of an Export Overdraft Arrangement

OverdraftDomestic sales can only do so much. The lure of international trade is real and the reason behind it is obvious, out there in plain sight. Opportunities abound but so do challenges; for instance financial risks, liquidity and collection. Luckily, there’s this thing we call an export overdraft arrangement.

An export overdraft is a type of financing particularly directed at entities that wish to take advantage of the world market without having to undergo the usual repercussions or threats that accompany it.

To export means to abide by international trade protocols and country-specific laws. It requires meticulous documentation, new market penetration, added collection responsibilities and of course the ability to dodge credit, interest rate and foreign currency risks. Let’s not even get started about receivables and cash availability.

But despite such challenges, entrepreneurs still want to do it. The cons may be present but so do the pros and they abound just as much if not more. But a smart business owner will want to mitigate such risks and challenges to the best they can. After all, who wants them tagging along with success? Nobody.

Export overdraft is a method that allows exporters to advance the value of their export sales invoices thus allowing them to receive cash almost immediately without having to wait for maturity. More often than not, receivables will lock up cash for prolonged periods of time preventing their immediate use and at times putting liquidity and solvency at risk. The longer a receivable remains outstanding, the higher the risks of non-collection. Cash sales are still there but majority of importers opt for deferred payments. They prefer to pay only until the goods have arrived to them or until they have been resold.

Because cash is received immediately, there’s less likelihood of losses due to the fluctuation in foreign currencies and delayed or default payments. Moreover, the duties related to collection shall be borne by the export overdraft provider. This includes all administrative duties and paperwork related to the job. Of course, this provides utmost ease for companies not only in terms of time and effort but also resources.

Export overdraft therefore also helps entities focus more on the income generating activities and operations instead of the backend duties. Plus, providers having had experience and expertise will often have a better grasp about a particular country’s culture, language and laws when it comes to invoices, payments and collections.

What You Need to Know About Spot Factoring Companies

spot-factoring-companiesSpot factoring companies are considered saviors for many reasons. They’re busy entities as businesses would often flock to them for help in terms of financing.

As the name suggests, they offer what we call single, selective or spot factoring. A term referred to as the strategic process of obtaining financial resources against individual invoices. It involved the freeing of any locked up cash within a particular trade receivable by enabling companies to receive cash in advance on a single outstanding invoice prior to its maturity and payment collection.

But with all that said, there’s still more to know about this financing medium’s providers. Today is the day we all discover that by reading on below.

  • Spot factoring companies provide their clients their needed resources by financing client invoices as they are generated and as they are needed. It is because the method is flexible and providers allow for liberty, Entities get to choose and handpick which invoice to use. They also get to decide how often the transaction is called for and when it will be used.
  • They’re no loan sharks. In fact, they don’t offer any type of credit. That’s because spot factoring is first and foremost not one. It is not a debt and therefore does not come with the usual strings attached such as but are not limited to simple and/or compounding interests, collaterals and foreclosures.
  • Providers may or may not absorb risks. Depending on the arrangement chosen, entrepreneurs may be able to shake off any risks of bad debts and non-collection. With a “recourse” option, credit protection is waived. Businesses are responsible for buying back the invoices which have not been paid by its customers to the provider upon its maturity. On the other hand, a “ non recourse” option shifts the risk to the spot factoring company who shall bear all losses in the event that the customer to whom the invoice is attached to defaults or delays their payment.
  • They offer onetime deals. Many businesses feel hesitant to work with and tap spot factoring companies for help. They are afraid of getting tied up in lengthy contracts and ongoing commitments which in the long run can be detrimental on their part. The beauty of the method is that it is a onetime transaction, selective and single as its name would hint on.

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