The Different Uses and Purposes for Spot Factoring

Unlike the traditional type, spot factoring involves only the specifically chosen invoice. In this type of financing service, the company has the liberty to choose which and when the invoice will be subject to a factor. Furthermore, it can also be classified to be with recourse or non recourse. The former puts the risk of non-collection from customers to you thereby you have to buy back any unpaid invoice. The latter on the other hand leaves you risk free as such burden is shifted to the factor. Regardless of that, spot factoring is used for the following purposes:

spot factoringEMERGENCY FUNDING: This is by far the most common reason why companies opt to use spot factoring as a funding method. There are certain instances, mostly unexpected, where there are expenditures that need financial resources but such is unavailable. Because spot factoring is quick, simple with minimal requirements for application, it is deemed but the perfect choice.

IMPROVEMENT OF WORKING CAPITAL: It basically improves working capital as it increases cash. It hastens the receivables and frees up any locked up cash in them making it available for use in projects or to pay for the usual expenses.

REDUCTION OF BAD DEBTS EXPENSE: This one is specifically related to a non recourse spot factoring arrangement. Since the risks that customers will not pay what is due them is transferred to the factor, you actually get to avoid them in all sense.

TO BETTER CASH FLOWS: Another purpose is to better to company’s current cash flows. This is quite obvious with the addition of cash and reduction of receivables in the financial statements.

AVOIDANCE OF DEBT: Because it is in no way a type of or even similar to a loan, there are no debts involved. Furthermore, interest expenses are not necessary. No compounding is bound to happen too. The fee to be paid to the factor will be a onetime expense. Such will be a percentage of the invoice’s value to be deducted to the remaining balance given to you upon the complete collection from your owing customer.

IMPROVE THE BALANCE SHEET: The statement of financial performance otherwise and more popularly known as the balance sheet is another thing that benefits from spot factoring. As stated earlier, it involves the conversion of receivables to cash thus not involving debt or liabilities. Only the assets portion has movement in it.

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