The Biggest Misconceptions About Spot Factoring

spot-factoringSpot factoring is the method of deriving finance out of a particular customer invoice. It is achieved by selling the right to collect against it to a provider called the factor who in turn grants a monetary sum of its value, often ranging from eighty to ninety five percent with the remaining balance to be given upon full collection from owing customer less fees. It is otherwise known as single invoice finance.

With its many perks and benefits, more and more companies have come to use it. Unfortunately, many misconceptions still hound spot factoring making others adamant about not using it despite of the proofs to its advantages. To help clear things through, we’ve listed down the said misconceptions and the truths behind them. Better read up to rid yourself of false information.

Misconception: It is a form of debt.

Truth: On the contrary, it is nowhere near it. Factoring is first and foremost the sale of a company’s asset and in this case, its receivables. This makes it a far different transaction from a loan. When one goes into this financing method, the transaction is recorded as a decrease in trade receivables and an increase in cash. The liabilities section is left completely untouched.

Misconception: The Company is tied to a contract.

Truth: With spot factoring, the company gets to choose when and how often to do it as well as which particular invoice to use. It provides for great flexibility and is a onetime transaction only. Bulk factoring however will be held out for a specified period of time and this is the one that involves a contract and all of the entity’s receivables.

Misconception: It is very expensive and greatly diminishes receivable value.

Truth: The fees involved are pretty minimal and this will be taken out of the remaining balance withheld by the provider up until full customer payment collection. Plus, such amount is discussed and agreed upon by both parties on the onset. Considering the time savings and collection burden removal, the fees are pretty cheap.

Misconception: The method is only for financially struggling companies.

Truth: Spot factoring is for everyone, solvent or insolvent, financially capable and financially troubled. This is because this financing medium banks on the creditworthiness of the customer to which the invoice is attached to instead of the company selling the rights against its collection. It is very much unlike bank loans and similar providers that have very strict credit requirements and meticulous application methods.

 

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