Spot factoring: Another alternative to bank lending
8 min read
26 March 2015
As small businesses look for new ways to raise money from investment other than through bank loans, invoice financing has been growing rapidly. Advocates include Lord Digby Jones, former president of the CBI and a trade minister under the last government.
The trend has been encouraged by another challenge facing SMEs – slow payment of invoices by suppliers. Small and medium sized businesses that have one particular invoice that is valuable but has been outstanding for a relatively long period are increasingly turning to spot factoring.
While invoice financing allows SMEs to raise money using their total outstanding invoices or a collection of them, spot factoring, also known as selective factoring, means they can do so using just one invoice. Lenders report that small businesses who are not yet familiar with invoice financing appreciate this “toe in the water” approach.
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- Considering seed funding? Have a look at your invoices instead
- What you need to know about invoice factoring
- Invoice factoring shouldn’t be frowned upon
“Although factoring is a method which has been around for the past 4,000 years, spot factoring is still a fairly new development for small business financing,” said David Banfield, president of the Interface Financial Group.
Marketinvoice, an invoice finance provider founded in 2011 has seen spot factoring increase year on year by 150 per cent. It has an online platform that gives clients access to funds in outstanding invoices otherwise tied up for between 30 to 120 days. Businesses can sign up online, sell an invoice and draw down funds on the same day.
“The UK is increasingly a service-based economy, this poses a major problem for bank lending, which is predicated on taking a significant amount of security to cover its finance products – a service business, such as a recruiter or graphic designer – won’t have the tangible assets for the bank to fall back on in cases of default,” said MarketInvoice’s head of communications, Paul Crayston. “With MarketInvoice the business can raise finance with no security required other than a single invoice. It’s also way faster than bank finance (we take hours not weeks and month), cheaper and more transparent.”
He advised SMEs thinking of going for spot factoring to look at the track record of the finance provider: “Make sure they understand the needs of your business, make sure you’re not going to be stung by hidden fees or contractual obligations, be aware that in most cases you’re going to use the service multiple times and you should benefit from that – so make sure you get discounts for a good track record,” he said. “Check the advance rate – some finance providers will offer you a greater proportion of your invoice up front than others.”
The company also has a peer-to-peer spot factoring platform. Here, a business can sell any outstanding invoices direct to investors for a small discount. It can apply and draw down funds within 48 hours and will receive up to 90 per cent of the invoice face value. When the invoice is paid investors receive their initial advance and a small discount and the remainder goes back to the business. The company has traded over £360m of invoices since its launch in 2011 and more than £270m in the last 18 months alone. The UK government, through the British Business Bank, is one of its investors buying up to £40m of invoices per year over its platform as part of its programme to help UK business accelerate growth.
Read more about SMEs shunning banks:
- UK banks are the biggest barrier to SME growth
- Banks shunned as SMEs investors turn to peer-to-peer lending
- Businesses increasingly relying on friends and family
Business financing provider Boost Capital has also seen an increase in spot factoring. Norman Carson, director of business development, said: “We appreciate the benefits of spot factoring for SMEs, as a one-off transaction can complement a company’s finances during periods when cash flow may be under strain.
“Some one in ten SMEs say that unpaid invoices cause them difficulty in paying staff or covering bills, while a quarter are late paying their own suppliers because of the financial hardship caused. Unpaid invoices are a fact of business, so it’s up to each SME to be cautious and shore up its own defences in order to avoid the curse of late payment and use spot factoring to their advantage.”
Banfield pointed out that spot factoring isn’t completely geared to a company’s credit standing. “This form of financing looks at a range of criteria which tend to make it much more user friendly for growing businesses,” he said. “It also doesn’t require any long term contracts, tie in or notice periods, and no termination costs if you want to discontinue use – so you can pay your bills, make repairs, cover payroll, or other expenses with the cash generated from spot factoring a single invoice.”
Like many other providers, Interface Finance Group offers a flexible advance rate which allows clients to decide what percentage of advance they need.
“One of the gripes I hear all too often from business owners is over the time spent worrying about their cash flow and chasing invoice payments, when they should be investing in their business and taking part in what they enjoy and usually excel at,” he said. “Spot factoring can help rid you of these worries by promoting a healthy cash flow – this allows you to take on new opportunities while minimising financial risks. You will be able to use the accelerated cash flow for the benefit of your company, such as repairs, new equipment or recruitment of staff.”
The opportunity to work on an invoice-by-invoice basis has great appeal to many of those who are not familiar with invoice financing, he said.
“With most financial facilities there is a substantial amount of paperwork to complete for the application process, followed by a waiting period as ‘someone’ decides your fate,” h said. The company believes that it has reduced paperwork to a minimum and has a set up period typically of less than a week.
He added a word of caution, though: “Repeat transactions usually take place within a 48-hour time span. It’s important to remember that spot factoring is best suited to those SMEs which are established and have reliable clients, that is clients who are not likely to query or dispute an invoice, and for SME’s that are on a good growth curve.”