Receivables factoring comes in two forms: bulk and spot factoring. Today, we’ll set out the differences and similarities of the two and hopefully help users establish which among them suits their needs best.
Bulk Factoring (BF) – Pertains to the use of customer invoices to draw immediate cash by selling the rights to their collection in exchange for an advance of their value, received before customers send in full payment or a part thereof.
Spot Factoring (SF) – Refers to the use of a specific customer invoice to draw immediate cash by selling the right to collect against it in exchange for an advance of its value, received before customers send in full or partial payment.
BF – Companies that offer credit sales and therefore has trade or accounts receivables in their financial books can make use of the financing method. It is not restrictive so entities regardless of size, status and industry can utilize it.
SF – The same applies.
BF – In this arrangement, all of the entity’s sales invoices for a particular period of time shall be subjected to the factoring method. Their values shall be advanced and collection shall be performed by the factor. It is a long term contract which will last depending on the agreement of the parties involved.
SF – In contrast, spot factoring is a onetime deal. It makes use of only one customer invoice making it a single transaction. It is because of this that it has been dubbed or called as selective or single invoice factoring in other places.
BF – The fee shall cover the long term period stated in the contract and will be a bulk percentage instead of an added up single fee for each invoice.
SF – There is only one fee involved which is dependent on the single invoice used. Because it is a onetime transaction, cost is also a onetime deal.
Despite their differences, both bulk and spot factoring come with similar benefits or perks. First of all, it is a zero liability deal. It is not a type of debt and is in fact an asset transaction where an increase in cash is coupled by a decrease in trade receivables. Second, it is immediate and fast without the usual fuss involved among traditional financing methods. Lastly because it hastens the collection process, it is able to better cash flows and improve the company’s working capital, allowing it to keep its liquidity or even improve it.