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Spot Factoring vs Contract Factoring

Spot Factoring vs Contract Factoring

In invoice factoring, you'll see spot factoring agreements and contract factoring agreements. After this article. You should have a good idea as to the differences of both and which one would be a better fit for your business.

What is spot factoring?

A spot factoring agreement allows you because the seller of the invoice to select and choose which invoices you sell. You don't have to sell any, you can if you want to, but there's no commitment.

What is contract factoring?

Contract factoring is exactly what it sounds like. You are signing a contract with the factoring company and agreeing to factor or sell a selected  amount of invoices.

That could either be a specific number of invoices or a total dollar amount and even in some cases you'll comply with factor all of your invoices. In that case, you don't have any choice. As soon as you generate an invoice, you automatically factor or sell that invoice to the factoring company.

What are the pros and cons?

There's pros and cons to both spot factoring and contract factoring.

First we'll look at spot factoring. Spot factoring the advantages you have choice. You get to decide whether or not you want to factor or sell those invoices to the factoring company.

The con or the exchange to doing so is usually the factoring company will advance less money and you'll need to pay a better factor rate so you'll find yourself getting less money up front and it's going to cost you more to do so in exchange for having the choice.

contract factoring, you don't have the same choice or freedoms that you do at spot factoring because you have an obligation to the factoring company in exchange for that obligation or meeting whatever the threshold the contract determines, you'll typically get extra money up front or a higher advance rate and your factor rate or the fee you pay to factor those invoices will be lower in exchange for having less freedom, you get extra money .

Which one is better for me?

Generally speaking, if you have a lot of slow paying customers or experiencing slow paying customers really frequently, a contract factoring agreement may be better for you because you have the peace of mind knowing that each one of your invoices, you can receive a higher cash advance up front

if you only have a few slow paying customers or you have a good collections mechanism within your own company. A spot factoring agreement may be a nice tool to have in your tool belt that you can go to and the few cases that you need it hope you're able to learn little bit more about the differences between spot factoring and contract factoring and which one could be better for your business.