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!

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