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The Single Invoice Finance Facility - What is Spot Factoring?
Posted by
Graham Tripp
,
in
Start-up Finance
11 December 2012
·
1,670 views
invoice finance Business finance Factoring finance small business SME spot factoring single debtor finance Touch Financial Start-up finance
Funding a start-up or small business is without a doubt one of most difficult things to acheive. With the New Year almost upon us established businesses need to ensure their cashflow is tight and start-ups should be using the New Year as a new start for really getting their business running.
You may have heard about a finance product called invoice finance. It takes the invoices you have which your customers have not paid yet and advances you a percentage of the invoice value (maybe around 80 – 90% of it). Once the customer pays the invoice, the invoice finance lender returns the rest of the percentage (the 10 – 20%) minus the charges for borrowing the cash.
Let’s Begin with the Downside of Invoice Finance for Start-ups
A downside of invoice finance, particularly for start-ups and smaller businesses which invoice finance is available for, is that sometimes you do not require the service every month. This means that you will still be paying the monthly fixed charges for having the facility for months - which you will not need it!
Single invoice factoring (or spot factoring as it is known in the industry) is a facility which is similar to invoice finance but instead of paying a monthly fixed fee to use the facility, you only pay the fees for borrowing the cash advance. So for each day you have the cash advanced, you pay interest and no other costs.
Who will be eligible for Spot Factoring?
There are a few different scenarios which see a business benefitting from spot factoring:
So why wouldn’t you use spot factoring over invoice finance all the time?
The potential downside for a company using spot factoring over invoice finance is that the interest rate is usually a more than with invoice finance. In order to determine whether a spot or full facility is right for you, you will want to look ahead and forecast how often you will be using the facility.
As a general rule, if you are going to be using the facility for less than a third of the year (< 4 months a year of money being borrowed) you may well benefit from the savings spot factoring brings due to no monthly charge. If, however, you are expecting to use a factoring facility for more than 4 months of a year, you may likely benefit from the reduced interest rates for the daily charges of a full facility even though a fixed monthly fee is in place.
Where to find the best spot factoring lenders?
Spot factoring lenders can be found through:
You may have heard about a finance product called invoice finance. It takes the invoices you have which your customers have not paid yet and advances you a percentage of the invoice value (maybe around 80 – 90% of it). Once the customer pays the invoice, the invoice finance lender returns the rest of the percentage (the 10 – 20%) minus the charges for borrowing the cash.
Let’s Begin with the Downside of Invoice Finance for Start-ups
A downside of invoice finance, particularly for start-ups and smaller businesses which invoice finance is available for, is that sometimes you do not require the service every month. This means that you will still be paying the monthly fixed charges for having the facility for months - which you will not need it!
Single invoice factoring (or spot factoring as it is known in the industry) is a facility which is similar to invoice finance but instead of paying a monthly fixed fee to use the facility, you only pay the fees for borrowing the cash advance. So for each day you have the cash advanced, you pay interest and no other costs.
Who will be eligible for Spot Factoring?
There are a few different scenarios which see a business benefitting from spot factoring:
- You only need the invoice finance facility for a third of the year or less.
- You only get paid once the job is complete but need funding to undertake the project (maybe a large construction job).
- You have a poor credit history and/or rating (your personal credit rating stops you from securing a bank overdraft or loan).
- Your customers credit rating is poor (the credit rating of your creditors are taking into consideration for invoice finance products such as spot factoring).
- You do not have the assets available to secure a bank loan or overdraft. (So no personal high value items or property).
So why wouldn’t you use spot factoring over invoice finance all the time?
The potential downside for a company using spot factoring over invoice finance is that the interest rate is usually a more than with invoice finance. In order to determine whether a spot or full facility is right for you, you will want to look ahead and forecast how often you will be using the facility.
As a general rule, if you are going to be using the facility for less than a third of the year (< 4 months a year of money being borrowed) you may well benefit from the savings spot factoring brings due to no monthly charge. If, however, you are expecting to use a factoring facility for more than 4 months of a year, you may likely benefit from the reduced interest rates for the daily charges of a full facility even though a fixed monthly fee is in place.
Where to find the best spot factoring lenders?
Spot factoring lenders can be found through:
- Internet searches
- This can provide you a mass of information to help you decide for yourself which lender may be best for you but will require a lot of research.
- Business networks/referrals
- This could be the best option for you if a trusted friend or business associate refers you to a lender they have already used – try your LinkedIn network.
- Financial Broker
- These brokerages are usually experts at finding you the best lender for your industry and business type. If you can find a no fee broker, you are laughing.
