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How spot factoring works

Spot factoring may be the solution to unpaid invoices and cash flow problems.

If your company offers 30- to 60-day payment terms to customers but you need that cash now, spot factoring may be useful. Spot factoring is a way to get funds for your business in about a day if you have one-time payments or need to meet payroll.

Much like invoice factoring, spot factoring gives you money upfront from unpaid customer invoices — either a portion or single load — fast. Some companies can get you funds in as little as 24 hours.

How does spot factoring work?

When you need money quickly, spot factoring allows you to sell your unpaid invoices to a lender who gives you a percentage upfront. Unlike regular invoice factoring where you consistently borrow against your invoices, spot factoring is there only when you need it. It’s a source of funding to consider when you need quick access to cash when business is slow, you have unexpected growth opportunities or an emergency situations.

Companies that offer spot factoring verify each invoice you submit by considering the creditworthiness of the customer — not your business.

Once you agree on fees and terms, you’ll receive your funds between 80% and 90% of the total invoice amount. The spot factoring company will take over and provide debt collection services. Once the debt is paid, you’ll receive the remaining invoice amount, less any fees or charges.

What should I compare between spot factoring companies?

Every factoring company is different, with different maximum lending amounts and fees. Consider these points when comparing factoring companies:

  • Advance rate. The advance rate is the percentage a spot factoring company will pay for your invoice, which acts as the collateral for the loan. An 80% advance rate would mean you’d get 80% of the invoice amount upfront.
  • Service fee. This is a one-time fee charged on every invoice you submit for financing. The fee is based on the total value of your invoice and can be anywhere from 0.1% to 20%.
  • Discount rate. This is a fixed percentage rate charged on your advanced funds. It’s calculated daily and charged every month. It can range from anywhere between 2% to 10% of the total advance.
  • Document fees. These are initial setup costs for the spot factoring company to cover credit checks and other work needed to advance funds. These can be anywhere from a few hundred to a few thousand dollars depending on your invoice amount.
  • Other fees. There may be other ad hoc fees associated with the factoring company. Make sure you’re aware of all the fees associated with each option you’re considering.

Pros and cons of spot factoring

  • Great way to ease your cash flow troubles. You can quickly access funds, often receiving your money in as little as 24 hours.
  • You may still qualify with bad credit. Since the creditworthiness of your customers is what invoice financing companies look at, you may still qualify with bad credit. However, you won’t be able to qualify if your account receivables have been pledged as security to another lender.
  • Unsecured. Spot factoring is not a form of lending, as your invoices are purchased upfront by the spot factoring company. As a result, you won’t be required to put up your home or business equity as collateral.
  • It can be expensive. Out of all invoice financing options, spot factoring is usually the most expensive since you’re working with one or two invoices at a time. This increases setup costs for spot factoring companies.
  • Depends on the credit of your debtor. Your ability to qualify almost entirely depends on the creditworthiness of the customers paying your invoices.
  • You may have to repurchase your invoice. If the debtor is unable to pay the spot factoring company, you’ll more than likely be responsible for re-purchasing the invoice and collecting on it yourself.

What cautions should I avoid?

Spot factoring may be a useful solution for dealing with one-off invoices that are causing a cash flow problem, but they shouldn’t be used consistently. Instead, find an invoice factoring company that can handle large amounts of invoices at once. This allows you to build a relationship and save money on fees.

Because spot factoring can be expensive, pay attention to the fees. These can quickly add up. A cost-benefit analysis is useful to determine if selling an invoice will be a good solution for your company. If not, a short-term option like a business line of credit may be more useful.

Compare more business loan options

If you’ve decided spot factoring isn’t right for your business but you still need financing, consider these top providers that offer term loans and lines of credit.

Name Product Filter Values Loan amount APR Requirements

Biz2Credit business loans
Finder Rating: 3.75 / 5: ★★★★★

Biz2Credit business loans
$25,000 – $6,000,000
Starting at 5.99%
6+ months in business; $100,000+ monthly revenue; 500+ credit score
Get only the capital you need through secure, prescreened lenders with this highly rated company offering SBA, expansion, working capital and other loans.

OnDeck short-term loans
Finder Rating: 4.6 / 5: ★★★★★

OnDeck short-term loans
$5,000 – $250,000
As low as 35%
600+ personal credit score, 1 year in business, $100,000+ annual revenue, active business checking account
A leading online business lender offering flexible financing at competitive fixed rates.

Fora Financial business loans
Finder Rating: 4.1 / 5: ★★★★★

Fora Financial business loans
$5,000 – $500,000
6+ months in business, $12,000+ monthly revenue, no open bankruptcies
Get qualified for funding in minutes for up to $500,000 without affecting your credit score. Best for companies with at least six figures in annual revenue.

Lendio business loans
Finder Rating: 4.75 / 5: ★★★★★

Lendio business loans
$500 – $5,000,000
Starting at 6%
Operate business in US or Canada, have a business bank account, 560+ personal credit score
Submit one simple application to potentially get offers from a network of over 300 legit business lenders.

ROK Financial business loans
Finder Rating: 4.7 / 5: ★★★★★

ROK Financial business loans
$10,000 – $5,000,000
Starting at 6%
Eligibility criteria 3+ months in business, $15,000+ in monthly gross sales or $180,000+ in annual sales
A connection service for all types of businesses — even startups.

Compare up to 4 providers

Bottom line

Spot factoring is an easy process that allows you to sell your invoices for immediate funding. Many spot factoring companies can have your funds ready within a few days, but the high fees make it costly to use regularly. If you’re looking for a more long-term solution, you should compare your other business loan options.

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