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How Does Spot Factoring Work?

Spot factoring also referred to as single invoice financing, is a mode of generating revenue by selling one or two invoices to a factoring firm without signing a long-term agreement. According to financial gurus, spot factoring is perfect for businesses that require cash inflow quickly. Here’s how it works.

  • Provision of Invoice to Factor

The first step of spot factoring involves the provision of a copy of the outstanding invoice by a business to its factoring company of choice. This copy entails details such as the name of the debtor company, the amount it owes, and the date at which it ought to settle the bill.

  • Authentication of Invoice by Factor

Once the factoring company receives the copy of the outstanding invoice, it then verifies it. The factoring company also conducts a thorough credit check on the debtor of its potential client. If the debtor has a negative credit score, the factoring company rejects the invoice.

  • Advanced Payment

If the factoring company authenticates the invoice and discovers that the debtor of its client has a good credit score, it pays out a portion of the amount declared in the outstanding invoice.

  • Final Payment

Here, the factoring company is paid by its client’s customer. Once it receives the payment, it simply cuts its agreed fee, then pays its client the balance.

Features of Spot Factoring

Different types of factoring tend to have different features. Listed below are the features of spot factoring.

Minimal Commitment

Some types of factoring usually require businesses seeking factoring funding to agree to monthly minimums and even long-term contracts. However, this is far from the case with spot factoring. If you’re looking for a factoring option that doesn’t require monthly minimums or long-term contracts, it’s safe to say that spot factoring is the suitable option for you.

High Discount Rate

If you choose spot factoring as your factoring option of choice, you should be ready to pay a higher discount rate than a business owner who prefers high-volume factoring. This is because, unlike a business owner who selects high-volume factoring, you don’t enjoy economies of scale.

Little Paperwork

To get spot factoring, you only need to apply, present your articles of organization, and submit your outstanding invoices. As this is the case, to get spot factoring, you need minimal paperwork.

Advantages of Spot Factoring

Spurs Growth

Spot factoring encourages the growth of businesses, as it allows business owners to raise the funds, they need by simply monetizing one or two of their invoices. Sourcing funds to invest in a business isn’t always easy. If you give spot factoring a try, you can source the money you need with much ease.

Flexible

Spot factoring allows business owners to choose the invoices they want to offload. Thus, it provides business owners flexibility. If you’d like to offload some invoices and retain some, spot factoring is the right factoring option for you.

Rapid Funding

Spot factoring allows for businesses to get quick funding. Hence, if you’re in dire need of quick cash, this factoring option has got you covered.

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