In most conventional invoice factoring relationships, the prospect uses the facility regularly. Depending on the client’s needs, they may factor invoices on a weekly, monthly, or some other regular basis. On the other hand, a “spot factoring” transaction occurs when a factoring company buys a single invoice as a one-time purchase. Both the transaction and the finance relationship end once the invoice is paid. Companies generally use spot factoring to finance a single, very large order.
Although spot factoring offers flexibility to its users, it’s also more expensive than conventional factoring for the following reasons:
Risk: Factoring companies view these transactions as riskier than conventional transactions. Usually, there are no additional invoices at hand (collateral) to add further security to the transaction. If the transaction fails, the factor stands to lose its investment.
Management: Invoice management costs for spot factoring transactions are higher because spot factoring transactions must go through the same setup and underwriting procedures as conventional transactions.
Uncertain volumes: Spot factoring volumes tend to be unpredictable, making it hard for factoring companies to plan their capital requirements and their revenues.
Minimum invoice size: Most spot factors will only finance invoices larger than a minimum invoice size. Although this amount varies by factoring company, most require that the invoice be at least a few hundred thousand dollars.
The obvious advantage of spot factoring as a business financing solution is it’s flexibility. It allows clients to work a single, very large transaction without having to worry about negative impacts to their cash flow.
To learn more about how it compares to other products, please read “Spot Factoring vs. Selective Factoring“.
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