It is not uncommon for business owners to require immediate cash. When this is the case, you’ll have several options. You could apply for a loan. You could apply for a line of credit. Or you could sell some of the assets you already own.
While most people think of property or equipment when they hear the word “assets”, these tangible things are just the tip of the iceberg. Essentially, anything of value to your business can potentially be sold. This includes, but is not limited to, the rights to future accounts receivable.
Depending on what industry your business operates in, it can take weeks or even months to reap the benefits of your sales. For some business owners, this amount of time is simply not acceptable. To get access to the cash they urgently need, these business owners will often consider factoring.
What is Spot Invoice Factoring?
Spot factoring invoicing is a practice where companies sell individual invoices to another party at a discounted rate. If an invoice is worth $400, for example, a business can sell this invoice to a third party and immediately receive $350.
While factoring decreases the amount of net revenue, you’ll end up receiving, it is an excellent strategy for accelerating the overall payment cycle. There are quite a few variables that can affect the factoring rate, including your factoring volume, the invoice size, your business financials, and the reliability of your clients. By assuming unpaid invoices, the factoring company is taking a small risk and will expect to be compensated. The time value of money will also need to be accounted for.
With all this being said, your business can expect the factoring rate to hover between 1 percent and 5 percent for every 30 days. With Strategic Capital, you can obtain weekly rates starting at 0.25%. Invoice factoring presents a unique opportunity for your business that is certainly worth considering.
What are the Pros and Cons of Factoring?
As you will quickly find with all financing options, factoring will have both pros and cons attached to it. Whether factoring is right for you will depend on your business’ current financial situation and long-term financial objectives.
The benefits of factoring are obvious. With factoring, your business can have quick access to cash, which you can then spend however you want. Many businesses will consider factoring during times when incoming cash flows are low and expenses are high. Other times, businesses will consider factoring when there is an investment opportunity expected to yield returns that are higher than the factoring discount.
The main drawback of factoring is that it can be pretty expensive. If the factoring rate is 4 percent over 30 days (a somewhat common rate), that rate is the equivalent of roughly 60 percent APR. If you do have other short-term financing options available, they may be worth exploring. However, if you can time your payments correctly, the high rates can be easily managed.
Is Spot Invoice Factoring Right for Your Business?
Spot invoice factoring is different from high volume factoring in several ways. Spot factoring—also known as single invoice factoring—requires a lower level of commitment and also carries lower fees. At the same time, spot invoice factoring usually charges a higher rate.
Generally speaking, spot factoring makes sense for businesses with high average collection periods, an urgent need for cash, and a willingness to lose a (relatively small) portion of future accounts receivable. It may also make sense for businesses that have sudden investment opportunities available. On the other hand, spot invoice factoring typically doesn’t make sense for businesses with consistent revenue streams, no particular need for fast capital, and a generally conservative approach to financing. In the end, only you can know which choice makes the most sense for your business.
Spot invoice factoring is an alternative way for your business to gain access to the working capital it needs. By selling individual invoices to a third party, you can accelerate the time it takes for your sales to turn into tangible cash. While it may not make sense for every business out there, it is certainly a financing option worth considering.
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