Spot factoring refers to a type of receivables finance that allows business entities to choose and draw cash from a particular customer invoice by virtue of advancing its value in exchange for the right to collect against it.
A loan on the other hand is an amount of money lent from an individual or a financing institution such as a bank with the premise that it shall be paid back within a span of time and with added interest.
Businesses and entrepreneurs have opted to use spot factoring over loans for a number of reasons, mainly in favor of the advantages that it brings. To learn more about said benefits, take a look and read on below.
- It’s very fast. – Too fast in fact in contrast to the other financing methods out there. Many providers are able to approve and release the cash in as fast as twenty four hours. This makes it a very effective alternative during emergency and immediate needs.
- It shifts the burden. – As previously mentioned, the advance received is in exchange of the right to the invoice’s collection. In other words, the provider shall now bear the responsibility of collecting from the customers to whom the invoice is attached to. This not only relieves companies of the job but also in a way saves them from the administrative costs of doing so.
- The costs are rather cheap. – Because spot factoring is a onetime transaction and involves a receivable chosen in particular by the company itself, the fee is pretty affordable. It only applies to the said invoice and does not hold the company to any long term agreement or contract.
- It hastens the collection. – Businesses need no longer have to wait until the invoice matures so that they can recognize and use cash attributed to it which now brings us to the next item on our list.
- Cash flow and working capital is improved. – As cash is freed up, an immediate injection enters the system thus helping improve cash flow levels and working capital strength. Furthermore, it helps improve liquidity.
- Spot factoring is not a debt. – Last and definitely not the least, it is not a debt and therefore not a loan either. The method is an asset transaction which when used shall decrease trade receivables and increase cash in the books. An expense account will also be credited to record the minimal fee involved but liabilities shall remain untouched so as interests.