Spot Factoring vs Contract Factoring: Which Is Best For Your Company?
Content
Reliable cash flow is essential for business success as it enables companies to meet financial obligations, invest in growth opportunities, and quickly address potential disruptions. Just as regular maintenance keeps equipment running smoothly, invoice factoring ensures consistent cash flow.
Invoice factoring is a flexible business financing solution available in different types to cater to the specific needs and conditions of various industries and business models. This article aims to clarify the differences between two types – spot factoring and contract factoring – and help you determine which option is best for your business.
The problem
Maintaining reliable cash flow is a major challenge for many businesses. While customers are demanding, expecting high-quality products and timely delivery, they often fall short when it comes to reciprocating with prompt payment. In fact, new insights provided by Xero reveal that small businesses are suffering the longest delayed payment times since the pandemic as late payments surged in 2024 Q2.
Research conducted by Intuit QuickBooks reports that businesses spend up to 10 hours each week on administrative tasks chasing late invoice payments. That’s more than a full working day dedicated to accounts receivable management (AR management) tasks that could be better spent driving business growth.
The solution
Many businesses understand that effective accounts receivable (AR) management goes beyond the traditional approach of investing time, resources, and money into chasing down payments. For an increasing number of mid-market enterprises, a more efficient solution is to accelerate their payment cycle. By utilizing flexible financing options, these companies fast-track the conversion of invoice receivables into cash. Invoice factoring has become a widely adopted financial vehicle to accelerate liquidity, enhance cash flow, and ensure financial stability.
How does invoice factoring improve cash flow?
Invoice factoring involves selling accounts receivables at a discount to receive immediate payment. Once invoices are submitted and processed, advance funds—up to 95% of the invoice amount—are typically transferred within 24 hours. This practice optimises liquidity, significantly enhancing the cash conversion cycle and reduces Days Sales Outstanding (DSO) to less than one day.
Leading factoring companies offer a variety of factoring arrangements designed to maximize funding speed, enhance credit availability, and improve cost-efficiency.
For B2B companies, two of the main types of factoring to consider are:
Although both types of invoice factoring offer fast access to cash for outstanding invoices, they vary in features, terms, and conditions. Let’s examine these two types more closely to help you decide which is best suited for your business.
What is spot factoring vs. contract factoring?
Spot factoring and contract factoring are two distinct types of invoice factoring, each with unique advantages tailored to different business needs.
Spot factoring – for an immediate cash injection
Spot factoring allows businesses to sell individual invoices at a discount to receive an immediate cash injection. It offers flexibility as companies can choose which invoices to factor, without being bound by long-term contracts or monthly minimums. Businesses can factor invoices as frequently or infrequently as needed to manage cash flow.
However, spot factoring can be more expensive than contract factoring, with higher factoring rates and lower advance rates. It also typically caters to larger invoices, as factoring smaller ones may not be cost-effective for the factoring company.
Spot factoring is particularly beneficial for businesses needing quick cash without committing to a long-term agreement. It is ideal for companies that face occasional cash flow gaps and value flexibility. Spot factoring is often used in industries with large projects, including construction, engineering, and consulting.
Contract factoring – a relationship to optimise cash flow
Contract factoring provides a steady stream of cash flow by continuously factoring invoices throughout the term of the agreement. This arrangement offers ongoing financial support, helping businesses manage cash flow more predictably through periods of rapid growth, seasonality, changing market demand, and economic downturns. Under contract factoring, a business typically factors most of its invoices over a specified term.
This type of factoring delivers consistent cash flow, enabling better financial planning and budgeting. It functions as a partnership, often resulting in more favorable terms and streamlined processes compared to spot factoring. Funds are transferred within hours of a funding request, with all transactions and account details recorded in real time for efficient management and transparency. Users manage their accounts via robust online portals to monitor transactions, view balances, pull reports, and more.
Leading factoring companies offer customized agreements tailored to the user’s needs. This customization usually starts with the user selecting specific invoice categories to structure their factoring facility effectively.
These categories often include, but are not limited to:
For companies that need only occasional cash flow relief, the downside of contract factoring is its longer-term commitment compared to spot factoring.
The choice between spot and contract factoring depends on whether a company prefers occasional cash injections or ongoing cash flow support.
Which is the best factoring type for your company?
Due to the continuous nature of the relationship, contract factoring companies generally offer more comprehensive support services compared to spot factoring companies. Leading invoice factoring providers often include enhanced services such as dedicated account management, tailored financial solutions, and integrated credit management. They may also offer more favorable terms and conditions, using the long-term partnership to provide better rates and additional services like invoice processing and collections support. In contrast, spot factoring companies typically offer more limited services, focusing on individual transactions without the same level of personalized support.
Why choose an experienced factoring company?
The best invoice factoring companies are industry leaders experienced in providing specialized services to various industries. They understand your business – how it works, the challenges you face every day, and the need for convenient, reliable funding that’s easy to manage. The products and services these specialized factoring companies offer are designed to seamlessly provide reliable funding, cost effectively and without hassle.
When you partner with an experienced factoring company, you get the backing of several professional teams to support your business. An industry experienced accounts receivable team manages collections courteously to protect your company’s customer relations while maximizing efficiency. A credit department is on hand to guide you through risk management and help protect your company against bad debt (customers who won’t pay). A dedicated service team streamlines processes, responds rapidly to complications, and ensures ease of use. To further support managing your business, experienced factoring companies provide industry insights and expertise to help guide strategic decisions.
Conclusion
Navigating today’s economic challenges requires strategic financial solutions to maintain stable cash flow and operational efficiency. Invoice factoring, with its various types and forms, provides effective options for managing cash flow.
Factoring companies offer different arrangements, such as spot factoring and contract factoring, to optimize funding speed, credit availability, and cost-effectiveness. Spot factoring offers flexibility for occasional funding needs, while contract factoring provides consistent, predictable cash flow for long-term stability.
Partnering with an experienced factoring company can enhance these benefits by delivering tailored support, favorable terms, and comprehensive services to help your business thrive. Choosing the right type of factoring and a reliable partner can significantly impact your company’s financial health and growth potential.
Contact us today to request a free financing consultation and see how we can help maximize your company’s cash flow efficiency.
Key Takeaways
- Maintaining reliable cash flow is a challenging and often frustrating aspect of business operations.
- Invoice factoring provides an effective solution for mid-market enterprises to accelerate their payment cycle and enhance cash flow.
- B2B companies should consider two primary types of factoring: spot factoring and contract factoring.
- Contract factoring typically offers more extensive support, while spot factoring focuses on individual transactions with limited support.
- Experienced invoice factoring companies offer flexible financing terms and valuable business insights to assist with strategic decision-making.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £4 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
