Spot factoring seems to be gaining popularity within the UK and is a fairly common procedure in the US. We are talking about factoring a single invoice as opposed to factoring whole turnover as you would with a traditional factoring facility.
Obviously if you have an ongoing requirement to factor each invoice or the majority of your invoices it makes sense to seek a suitable factoring facility.
However, if you are looking for a short term solution to a cash flow “hiccup” then spot factoring can be ideal. It means that you can factor a single invoice and once that is paid you have no contractual obligation. You can also revisit the “facility” further down the track if you have another invoice you wish to factor. In essence you can “dip in and out” as you need to.
This can be quite attractive to some businesses. So what are the down sides?
In short the interest rates can put some people off. Most lenders will quote a daily interest rate which sounds nominal. However, this can equate to an APR of circa 80%. But does this make it more expensive than traditional factoring?
Well the interest rate is 10 – 20 times more than what you will pay on a traditional factoring facility but your debt may only be outstanding for 30 days. Traditional factoring can attract minimum service fees and minimum contract periods which can mean if you have a genuine short term requirement traditional factoring can be expensive.
While rates for spot factoring may well be higher than the rates for whole turnover factoring, if you have a genuine short term requirement spot factoring will typically be your cheaper option in terms of pounds and pence!!
So is it the future? I am not sure but it is another valid solution for many businesses so it should be embraced.
