14 Aug What The Hell Is Spot Factoring & Should You Avoid It?
I learned a long time ago that businesses used to deal with a financier (a guy who had cash) that would go from door to door and business owners would hand over their invoices that normally took thirty to sixty days to get paid in exchange for 80% cash in hand, on the spot.
The financier would literally stamp the invoice with a notice, hand you the cash and then collect that money from the customer once it was due. Every week he would show up to repeat the process or whenever his clients needed money. He provided a valuable service for the community, which helped his clients out when they needed quick access to money instead of waiting for his customers to pay. It also helped them to sell more by offering payments terms to customers that the door-to-door financier thought were good for payment.
He wouldn’t give you money for the “promises to pay” customers that had a poor reputation amongst the community, so I guess you could say it helped the business owner as well to demand payment up front from the customer instead accepting the “pay me later.” This was a very early system of determining the credit worthiness of your customer based on a benchmark or integrity standing within the community and your financier, helping you to prevent losing money.
Flash-forward to today’s “on the spot financier”
Today these financiers go by the names “spot factors” or “single invoice financier,” both are exact forms of traditional invoice factoring as we know it in Australia, however carry the old world style that our Australian settlers were used to without the same cost for the service.
Today, spot invoice factoring would still be considered an expensive option for financing your single invoices, however I would say that since there is nothing to compare it to then it is what it is, the cost is irrelevant. We see the cost to finance a single invoice anywhere from 3.5% – 10% of your invoice/s depending on how long it takes for your customers to pay. Which some might consider not expensive at all, especially if you offer discounts to customers to pay you early which are usually 5%-10% anyway.
How does it compare to other invoice factoring options?
To cut through an in-depth analysis of the industry I am just going to break it up into two categories that are on offer:
Contractual on-going invoice factoring
This is the most common type of financing option available throughout the country. They offer a very low cost per invoice to finance, sometimes as low as bank overdraft rates. You are required to finance your invoices on-going day to day and are a seriously great option for businesses requiring regular access to cash flow. They will however tie you into longer-term contracts usually starting at twelve (12) months and have a minimum fee that needs to be made up over the term which is kind of how a mobile phone contract operates.
Spot Invoice Factoring – Single Invoice Finance
More expensive on a “per invoice” basis, however the flexibility is nothing short of incredible. There is no lock in contracts, no on-going fees, no company audits and you can pick and choose whichever customer you like as long as they are credit worthy. The latest online funder to offer a marketplace where you can pick and choose what invoices you finance is www.postinvoice.com.au
So is it really expensive?
You should choose a spot factoring option when you only need access to funds periodically such as lumpy trading periods, sudden growth opportunities or expenses. If this sounds like you then, comparing it to a longer contract style financing option can in some cases work out to be the same if not cheaper price given that you only use it a few times a year and avoid any contract fees or costs.
Both factoring options serve a completely different purpose and it’s important to know which one fits your situation. Longer-term facilities act more like a line of credit to be continually drawn down against and have a very good pricing structure when used over a longer term.
Spot factoring, just like in the old days works as a very convenient method of accessing funds quickly. There are a lot of niche funders scattered throughout Australia that offer this type of financing which have joined the Loandesk network. At the end of the day, you need to make a commercial decision about financing your invoices. How will you use that money and is it worth it? One last key point is that this type of financing is based purely on the quality of your customers/debtors, no other security is taken and if your credit file isn’t looking to crash hot you’ll still be able to get access to immediate funding.
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