Spot factoring is a business transaction approach that revolves around small business financing. A small business receives payment for their open invoices. The payment covers the invoice, and the invoice is “sold” to a third party spot factoring provider. The third party then receives the payment for the invoice when it comes through.
It is not unlike debt sales. A company has their debt invoices. Instead of dealing with them directly and having them recorded in their books, they sell it. The debt buyers are now free to chase down payments as they see fit, relinquishing the responsibilities from the original lenders. The third party will assume 100% responsibility for the invoice, which frees up their time and their finances for other tasks.
How does this benefit the invoice holder?
The original invoice holder has the lovely perk of being able to get money now for an invoice, as opposed to waiting to maturity. Some may argue that the payment is the same regardless. Why go through the extra steps? In the case of spot factoring, the original invoice holder can actually implement the funds from the invoice to other sources. They can act faster and with more income. Why would they have to wait if they can get paid now? The company can act faster with extra active capital.
Where can the money go from paid invoices?
The amount paid for invoices is liquid cash. It can be used for any purpose. To clarify, it is not tied to specific business tasks or in some kind of escrow-oriented account. It is free to be used in any way for the original invoice holders. They can then develop on new projects, build new machinery, increase payroll, and do as they desire.
Imagine having all open invoices paid for. This kind of arrangement is known as spot factoring, and it is directly injecting new resources to companies of small to moderate sizes. Spot factoring is the boost many companies need to stay at the edge of the competition. without these third party payments for invoices, companies are restricted by the payment of customers directly.
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