5 of the Biggest Misconceptions About Spot Factoring

Invoice letter head with pen and calculator / selective focusMisunderstanding, in most cases, is the root of all problems. Our lack of adequate understanding and comprehension about things can cause us to misuse or even brush away the potential of something that would have otherwise been great. Such is the case for spot factoring.

Also known as selective or single invoice factoring, it falls under the category of receivables or invoice financing. As its name suggests, it allows business entities to use their sales invoice to raise needed funds. In this arrangement, the company chooses a specific receivable and advances its value prior to its maturity thereby hastening collections.

Here are a list of the five biggest misconceptions surrounding it.

1. It adds to debt or liability.

Many assume that all types of financing are a loan. Spot factoring begs to differ because it isn’t one. It is, as a matter of fact, a type of asset transaction. The company essentially sells the right to collect from the invoice in exchange for an advance of its value, often upfront and within 24 hours. It reflects in the books as a decrease in receivables and an increase in cash as well as a debit for an expense account regarding the minimal fee. It comes with zero interests and no asset based collateral requirements.

2. It is expensive.

On the contrary, it’s rather cost-effective. The fee is a onetime transaction and comes with a fixed price agreed on by all parties at the onset. Plus, spot factoring is a onetime transaction with no long term contacts involved.

3. It hurts customer-client relationship.

The terms of the credit sale remains the same so there’s no need to worry about client fallout due to factoring. The collection function may be transferred to the provider but these are professionals trained in the craft.

4. It’s too much of a hassle.

On the contrary, it’s one of the easiest to process. Providers don’t even require or check credit score because it’s not a debt to begin with. There are lesser papers to submit and it can be processed in a matter of 24 hours. What hassles are we talking about?

5. Only established entities can use it.

What’s great about spot factoring is that it’s non-discriminatory in the sense that any business entity regardless of size and industry can make use of it from conglomerates to small and medium scale enterprises to startups and even recovering entities.

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