Traditional and Spot Factoring: What’s the Difference?

spotfactoringInvoice finance has come to bread various methods under its belt, each of which has their own unique perks and benefits. Take traditional and spot factoring for example. The two have almost the exact same advantages but they’re still different, if by a smidge. There’s a thin line that draws them apart and unique from each other and today we’ll explain further and help you understand them.

Traditional Factoring

In this type, the entire invoice or receivable bulk is subjected to the financing method. In other words, each and every invoice is advanced thereby allowing the company to receive the cash attributed to them prior to their maturity and before actual payments by customers are made.

This involves a long term contract which can last from a few months to years depending on the terms agreed upon by the parties involved.

Control and burden of collection of all receivables shall now cease to be the company’s as it is shifted to the factor that carries such responsibilities.

Spot Factoring

On the other hand, spot factoring only involves a specific and single invoice purposely chosen by the company itself for whichever reason it deems fit.

It is therefore a onetime transaction and does not involve any lengthy contracts or arrangements. The company may choose to use it whenever and how often it wants and the choice of the invoice used lies completely up to them as well.

In the same manner, cash equivalent to the value of the receivable is advanced prior to its maturity and before payments by customers are made. The task of collecting also rests with the factor or the financing institution.

Benefits

As mentioned previously, both traditional and spot factoring still carry a good number of similar benefits. The thin line that separates them after all is the number of receivables used and the length by which the transaction or relationship between the parties exist. To be specific, here are the two major perks of using them:

  • They strengthen working capital. – By allowing for better liquidity and freeing locked up cash within invoices, both provide for a better cash flow thereby empowering working capital and making resources available for immediate use in operations.
  • They’re no debt. – Both traditional and spot factoring are asset transactions. In that sense, they are no liability or loan so they do not come with the strings attached to one such as interest. They even reflect in the books as a decrease in receivables and an increase in cash.

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