Flexing Your Financial Muscles: Things Every Business Owner Needs to Know About Spot Factoring

If you run a business you will know that cash flow is king and when you find your venture becomes starved of the oxygen of money flowing through your account, it can seriously inhibit your plans and create operational difficulties.

When the situation is only temporary and you need an occasional rapid injection of funds, one option would be to consider the idea of spot factoring as a viable alternative to seeking out a bank loan.

Here is a look at how spot factoring works and how you can make the most of this borrowing option. This includes an overview of why this service could be a suitable solution, how to fairly compare interest rates, and a look at why shifting the burden of invoice collection can boost your business.

The freedom of flexibility

Invoice factoring is not a new concept and is an established method of keeping the cash flowing regularly by raising cash against the value of your invoices.

There are costs attached to factoring in just the same way as you can expect to pay interest charges and fees if you arrange a bank overdraft, but it does mean that you don’t have to wait to get paid for your invoice in the normal way.

Although this is a popular option for many business owners, you might not need or want to make a commitment to signing up to a deal where all of your invoices are factored.

This is where spot factoring comes into its own. Companies like Business Factors offer customers the flexibility of being able to factor invoices on an as needed basis rather than having to sign over everything to factoring.

This means that if you experience a temporary blip in the regular flow of cash into your business or you need a quick injection of funds, you have the option of factoring as few or as many receivables as you want to raise the amount needed to get back on track.

Comparing rates

If you sign up to a spot factoring agreement rather than commit to a full factoring option, you can expect to pay a higher rate of interest for single invoice factoring.

It is a good idea to put these higher rates into context. If you factor all of your invoices you will pay a lower rate of interest to borrow against your invoices but you don’t normally have the flexibility of deciding which invoices you want to factor.

The fact that you can go months at a time without needing to use spot factoring but the facility is there when you want to use it, once you have signed up to the facility, is often considered to be worth the slightly higher borrowing rate, in view of the flexibility it gives you.

Many business owners who use spot factoring tend to view the facility as a form of insurance against cash flow problems, and therefore accept that it can be worth paying a slight premium for the service in comparison to other factoring options.

No collection worries

If you spend far too much of your time chasing overdue invoices and trying to get customers to pay promptly, this could be having on impact on other parts of your business.

Stressing about cash flow and chasing payment means you have less time available to concentrate on other aspects of your business and you might even struggle to make effective plans for taking the company forward when all you can think about is getting enough cash in to keep everything ticking over.

Spot factoring shifts the burden of invoice collection to the factoring company. When you sign over the invoice to them they send you a percentage of the invoice value almost immediately and then assume the responsibility of collecting the amount on your behalf.

This will free up more time and cash to concentrate on growing your business.

Universal solution

Spot factoring provides a viable cash flow solution to many different types of business.

Some businesses experience seasonal highs and lows, which puts their cash flow under pressure at certain times of the year, others just want the option of calling upon a quick and easy solution to getting their hands on the money due from their invoices, as and when they need it.

Trying to arrange a bank loan or a temporary overdraft with your bank can be time-consuming and expensive. At least with an option like spot factoring, you have a go-to solution that is there as and when you need an urgent injection of funds.

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty-five years. Mr Bernfeld established both equipment leasing and accounts receivable factoring companies. He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.