Looking for a medium of financing is no easy job. With so many alternatives out there, people can get seriously lost. Confusion is something we’re all bound to face but that doesn’t mean that we can’t work around and away from it. This makes it important to understand each option before diving right through. Today we shall do exactly that by first getting to know more about spot factoring and what makes it a wise move.
Spot factoring falls under the category of receivables financing. It works by deriving cash from a customer or sales invoice. With this particular type, a specific invoice is selected. The rights to its collection are then traded to a financing institution called a factor in exchange for an advance of its value, often equal to at least 80% of its total worth with the remaining balance less the fees forwarded only upon collection from the owing customer. The collection function and all other responsibilities attached to it shall also be borne by the factor.
The reason why the method is often utilized lies in its various benefits as follows.
First, the cash is received almost immediately and prior to the receivable’s maturity. Some providers can even release the sum in as fast as a day’s time, something than no other type of financing is capable of.
Second, it hastens the collection. Businesses no longer have to wait for the invoice to mature before they can collect and use the cash. It essentially takes out the waiting game.
Third, it’s perfect for immediate needs. It cannot be denied that some invoices hold quite a significant value which can be used for an emergency expense or for purposes of operations and reinvestment. Because of its swift process, spot factoring is but the perfect choice.
Fourth, it strengthens liquidity and working capital. Because the locked up cash is freed almost immediately and prior to its supposed maturity, it injects resources into the system thereby improving working capital and liquidity at the same time.
Fifth, it is a onetime transaction. Spot factoring is selective in nature meaning that businesses have all the liberty to choose which invoice to use and when. There are no long term contracts involved so entrepreneurs need not fear of being tied to an agreement for a significant period of time. Plus, they have all the option to use it as often and as less as they want.