Spot factoring is a type of factoring in which a company has the flexibility to factor their invoices on an as needed basis, and aren’t bound by any minimums or schedules. A company can go months without utilizing the service. Should an unexpected period of tight cash flow arise, they have the flexibility to factor as few or as many receivables required.
Spot Factoring to Protect Your Cash Flow
Spot factoring (also known as single invoice factoring) can almost be thought of as an Insurance Policy of a sort. A company can establish an arrangement with a lender that allows them the option to quickly factor an invoice in a crisis. This can provide a tremendous value for your business, but there are some disadvantages of spot factoring.
Single invoice factoring has much higher rates than other types. A lender may also advance a smaller than usual amount up front. Rates may also be variable and subject to fluctuations, Though you can generally expect higher rates for the flexibility it offers.
Establishing a spot factoring account
It can be useful to establish an account with the factor ahead of them to use the service as a defacto “insurance policy”. The process of establishing an account usually takes about a week, so it’s important to do it ahead of time. It’s also important to note any special clauses in an agreement. The factoring company wants you to factor at least some invoices from time to time, so there may be a cancellation clause if you don’t use their service for a specified time period. They may also charge a fee for inactivity.
Who uses single invoice factoring?
Many companies benefit from using single invoice financing, but there are some that tend to utilize it heavily. Many trucking companies use it as a safety net for periods of seasonality. Because the freight industry is heavily affected by weather, natural disasters, government regulation, and economic conditions; freight carriers choose to hold an account with a spot factoring company to ensure that they will be able to keep their trucks fueled and on the road.
The bottom line
Spot factoring is an extremely form of factoring that can act as a sort of insurance policy against your cash flow. The flexibility it provides can help keep your business afloat during a crisis.