Category: spot factoring

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!

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.

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.

Questions to Ask Yourself Before Using Spot Factoring

spot factoringSpot Factoring is an arm of Receivables Financing that enables business entities to choose a sales invoice and advance its value in exchange for the right to collect against it, all before the owing customer sends in partial or full payment.

Truth be told, it is a very powerful tool that comes with a slew of benefits making it one of the most laudable finance mediums of today. It is used by many entities, regardless of type, size and industry. But just like anything else that involves financial matters, it has to be taken with a grain of salt. After all, there’s no one size fits all method and its effects can be different from one user to the other. Research and analysis has to be done first in order to assess if it really is the method that suits the company’s needs best. With that said, we’re giving you 5 questions to ask before bringing Spot Factoring into play.

1.    “Do I understand how Spot Factoring works?”

It is crucial that you do or else it would be impossible to make a good decision. One cannot fully determine its feasibility if one could not grasp its processes, purposes, costs, perks and drawbacks.

2.    “Which receivable will I use?”

Spot factoring is a one-time transaction. The company has the liberty to pick which receivable to use and when. Of course, opt for one that’s of significant value and will cover for your needs. Make sure that the customer is creditworthy to ensure a higher approval rate.

3.    “Where will the funds be utilized?”

Define the purpose of the fund. One simply cannot advance just because. There has to be some valid reason behind it and once the cash is received, it has to be allocated accordingly to ensure maximum use and zero wastage.

4.    “How fast will the cash be released?”

The strongest charm of Spot Factoring lies in its ability to derive cash almost instantaneously. Many providers are able to do so within twenty four hours but this isn’t true for all so inquire first before you decide on anything.

5.    “Is the provider trustworthy?”

Always choose a quality Spot Factoring provider. Research the area for companies that offer the service and run a background check on them. Look for any reviews and feedback and pay them a call and a visit to discuss available services and terms. Don’t jump on the first provider you find.

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