Let’s suppose you have your own business and you’re running out of working capital. But you are awaiting payment for one large invoice which can very well solve all your current financial problems. Is it possible to factor one invoice?
While you have a lot of single invoices worth thousands of dollars each, you have this single invoice that’s worth $200,000. But your problem is that you need the money now and not in 30 days.
Banks can’t save you because they take too much time to process loan applications. Besides, a bank loan is all but impossible when you have no other assets to use as collateral.
But you can use factoring. And even though factoring usually entails getting advances on invoices on a continuous basis, some factoring services offer spot factoring, which may involve factoring one invoice only.
How Spot Factoring Works
Essentially, it pretty much works like a typical factoring service. The factor buys the invoice from you, and then offers you a certain percentage of the value of the invoice as an advance. When the customer pays in full, the factor takes back the advance and the fees it charges from the customer’s payments and then forwards the rest to you.
Pros of Spot Factoring
Spot factoring, like other forms of factoring, is much easier to get than a bank loan, and the entire application process is much simpler and faster. With factoring, you can get the money you need quickly, so that you can meet payroll, service your most expensive debts, or take advantage of growth opportunities.
But spot factoring does have several advantages over regular factoring.
Here, you’re not forced to hand over all your invoices for factoring. You can choose which invoices or even which single invoice to factor. Since it can mean you only need the factoring service once, there are no locked in contracts to worry about. And that means there are no break fees when you leave a factoring service.
It’s this flexibility which can greatly appeal to small business managers. Perhaps you can pick the invoices with the largest value, or the ones which take a long time for complete payment.
Administrative fees may also not apply. For example, some factors charge annual fees, and this may not be applicable for spot factoring.
You may also maintain most of your customer relationships because customers pay you directly, unlike in factoring when your customers pay your factors directly instead.
Cons of Spot Factoring
Perhaps the most obvious drawback to factoring one invoice is the cost of the advance. Some factors may charge up to 30% of the value of the invoice. That can really cut down on your profit margin.
Deciding whether spot factoring is right for you depends greatly on your circumstances. It probably works the best only if you have a single invoice that is worth a lot more than your average invoice. If that’s not the case then what you really need is selective factoring. This is when you pick which of your invoices which will be factored. But if you keep on needing more capital on a regular basis then you may as well go for regular factoring, which will cost you a lot less.