The practice of spot factoring consists of a one-time transaction involving a large single invoice. The lender purchases the invoice from a business by paying an advance of between seventy to ninety percent of the total value. The rest of the balance is held in reserve until the invoice is paid in full. At that point, the lender takes the agreed upon fee and forwards what is left to the business. The costs are higher than traditional and ongoing factoring, but the convenience is often essential for the business to improve cash flow, get the money quickly to cover expenses or be able to meet payroll. This type of factoring is a solution that requires no commitment and is faster than getting a bank loan.
One disadvantage is that it can take up to a week to set up the process. That will not help out a business in an emergency. There are a few things a business can do to prepare for the transaction early so the process can be expedited when it is needed. The first thing to do is find a company that has the capability to purchase a sizable invoice with little notice and is willing to do so. Many factoring companies do not offer single transactions because they do not secure long-term profitability. Seeking a company ahead of time also allows the business to compare advance percentages and fees of various companies.
Keeping the business books in excellent order is another way to prepare. A factoring company will want to review accounts to ensure the business is sound and the customer has a solid history of paying invoices in a timely manner. Clear and organized bookkeeping will expedite approval and increase the advance percentage. The fees may be lower as well because the company expels less effort in reviewing the business. Selecting the invoice to be used is another consideration prior to factoring. An invoice that is not promised as collateral for any other financing is the best choice. Some companies will not factor an invoice that may be compromised. Discuss needs and possibilities honestly with the factoring company. Companies will do background checks on businesses so hearing about any past credit issues up front will work in favor of the business.