Broadly speaking factoring is a means of funding your business through selling accounts receivable to a third party as a discount. If you need quick cash to meet your immediate business needs factoring could be exactly the solution you’re looking for.
But here’s the thing: There’s more than one way to do this. The term “factoring” could refer to any one of a number of different financial transactions.
In this post we’ll focus on two factoring options that while closely linked, could result in widely different financial implications for your business.
Spot factoring is a flexible and secure means of quickly accessing cash without jeopardising your business’s financial integrity.
Standard factoring agreements might include granting cash advances against future credit or debit card sales. This of course could involve factoring your company’s entire turnover.
But with spot factoring, funds are instead released from a single invoice which can be factored at any time within its payment cycle. In this way you can release funds that might otherwise have been tied up in outstanding invoices.
There’s no monthly fees or commitments to worry about and you’re free to use your lump sums in any way you want. So whether you need to purchase new stocks, equipment or materials or you just need to release some money to aid your general cash flow, spot factoring can help.
Repeat factoring involves long-term, ongoing agreements. While this can help larger and more established businesses to have constant access to funds, many small to mid-size businesses are defined by their unpredictable monthly cash flows.
Given that they call for minimum monthly repayment fees, repeat factoring arrangements might pose a problem for the sort of smaller businesses that have to cope with constant fluctuations to their cash flow situation. There may be times when it’s not strictly necessary to draw down on funds. But even when this is the case, there’ll still be an obligation to keep up with the monthly fees.
So when it comes to factoring which approach is right for your business?
Well the short answer is that it all depends on your cash flow situation.
If you’re so well-established that you’ll be able to make your monthly repayments without compromising your overheads, repeat factoring can release funds for immediate use that may otherwise have been tied up in future transactions.
Many lenders set a specific criteria for the sort of businesses that qualify for repeat factoring. When it comes to credit card factoring for example we require for your business to have been established for at least 6months and for your monthly turnover to be at least £3,500 through card sales.
If you do not meet this criteria or if your cash flow situation is too unpredictable to cope with monthly repayments then you’re likely better off choosing the spot factoring approach.
And if you’ve got any more questions about factoring, or any other aspects of corporate finance, contact one of our experts today on 0333 358 3502.