What is spot factoring and how does it work?

Spot factoring is a term used to describe the use of invoice factoring on a one-time or occasional basis rather than as an ongoing financing tool. It’s when a company chooses to factor one or more accounts receivable invoices in order to unlock working capital.

How does it work?

Spot factoring works the same as accounts receivable factoring, aka invoice or A/R factoring. Here are a couple of scenarios to demonstrate the process:

Spot factoring scenario one: XY Manufacturing is a small supply chain business that just got a large order, larger than they’ve previously tried to fill. They hired an extra shift of workers to fill the order and got it out the door, but now find they need a payroll loan to cover the earnings of the extra workforce.

Instead of waiting for payment on the big order to come in, they factor the invoice and get an advance of 96% of the invoice amount. The factoring company waits on payment while XY Manufacturing goes to work on the next big order. Once the invoice has been paid, the factoring company collects their 2% fee, and the remaining 2% is sent to XY Manufacturing.

Day one

• XY Manufacturing ships the big order out and generates a $68,000 invoice
• XY Manufacturing factors the accounts receivable invoice and gets a $65,280 advance which covers the extra payroll—and then some

Day 30+

• The factoring company receives payment on the invoice, collects their 2% fee and returns the remaining holdback, or reserve, of $1,360 to XY Manufacturing

Spot factoring scenario two:

A young software startup, UV SaaS, launches a new app, sends out a press release to get some media coverage, and gets a rush of downloads. Wanting to capitalize on these early gains, UV SaaS looks to get into Google Advertising but hasn’t yet seen payments come in on the app downloads. They receive an earnings statement showing that $37,000 will be coming their way in 30-60 days.

Instead of waiting 2 months to get paid ads generating more app sales, they factor the earnings statement and get a 97% advance of $35,890. 30-60 days later, once the invoice factoring company receives payment from the app download store, they collect their 2% fee and return the 1% holdback reserve of $360 to UV SaaS as well. Meanwhile, UV SaaS invested that $35k into Google Ads and app downloads skyrocketed.

These scenarios show that even if you don’t plan to factor often or on an ongoing basis, accounts receivable factoring is a fast, flexible financing tool. Instead of losing out on opportunities, spot factoring can be the means of help you grow your business faster.

Best times to use spot factoring:

• As a payroll loan, or factoring payroll loan when you need to increase the size of your workforce to grow
• When you need to expand inventory quickly to take on a big client or large order
• When the unexpected happens and you need to quickly unlock working capital for repairs
• When the unexpected arises and you need working capital to take advantage of an opportunity

Who can use it?

Any company that sells to customers on terms or sells through third-party distributors (like eCommerce platforms) can use spot factoring to unlock money they’ve earned without waiting on the customer or third party to pay. Nearly any type of B2B company can use spot factoring financing, however, it’s most commonly used by temp employment and staffing agencies, supply chain manufacturers and distributors, IT consulting companies, e-commerce sellers, trucking companies (and trucking owner-operators), and similar types of businesses that sell to customers on terms.

Best spot factoring companies

Ready to give spot factoring a try? We work with some amazing accounts receivable factoring companies that are happy to work with spot factoring clients. It’s not always the case, by the way – some factoring companies want to lock you into factoring minimums or long-term contracts. We think it’s better to choose a factoring company that lets you stay in control so you can always act in the best interests of your business.

Hit us up for a free quote and we’ll connect you with one of the best spot factoring companies offering:

• Fast, same-day advances
• Low factoring rates – as low as 2%
• Competitive advances up to 95-96% – or even higher
• Factoring with low holdbacks and even no holdbacks
• No factoring minimums – factor only when it’s right for your business
• Spot factoring, micro factoring, and small business factoring (small ticket invoice factoring)