By David Banfield, President, https://www.interfacefinancial.com" target="_blank" rel="nofollow">Interface Financial Group

For the estimated 5.2 million SMEs in the UK that either survived or started trading during the economic downturn, talk of recovery and growth will come as welcome news. Both consumers and businesses are investing and spending once again, and this means there is an opportunity to sell more and expand your operations. Of course this new era will bring with it a whole new set of challenges that business owners will have to overcome.

However, one issue that has carried through from the downturn is the difficulty small businesses have in securing access to capital. Increased regulation and risk standards mean that the big banks are still slow to lend to small businesses, even in cases where the loan may be required to fulfil an order or invest in the company’s expansion. In 2014 approximately one in five SME overdraft and loan applications was rejected.

As a result many business owners have sought alternative forms of finance to help sustain and drive their businesses forward. One such source, which is becoming increasingly popular amongst the UK’s SMEs, is spot factoring. However, many people are still unsure of just what spot factoring is and whether it’s a feasible option for them. Hopefully this article will provide some clarity.

What is Spot Factoring
While it is a well-established service in the USA, spot factoring - also known as single invoice factoring - is still relatively new in the UK. Simply put, it involves selling your accounts receivable (invoices that are due to you and are current but unpaid) at a discounted rate to a factoring company. You have the option to sell one invoice or a batch on a ‘use it as you need it’ basis.

Advantages of Spot Factoring
While I could fill this whole article extolling the benefits of spot factoring, here are some of the most prominent advantages:

1. Empowers SMEs: Spot factoring has shifted the power from factoring companies back to SMEs by allowing them to sell the invoices they want, only when they need to. Traditional factoring services tend to insist on yearlong contracts, where all invoices must go through their system. This is a major deterrent for many business owners who may have only needed to sell a couple of invoices to get them through a particularly difficult period. An online market research client of ours needed funding to take on more staff and deal with admin. The invoices we purchased from him over three months allowed him to pay extra salaries and take on a number of new clients. His business is now self-funding.

2. Quick Access to Capital: Unlike bank loan applications, crowd sourcing or many of the other finance options available to businesses, a spot factoring deal can be turned around in a very short time, often in less than 24 hours. Such a rapid process means you can access the funds you need, when you need and then get the money working for you immediately. One recent example of this was a construction sub-contractor who was awaiting payment from the NHS just before Christmas. Unfortunately due to their extended payment terms it did not appear as though payment would be made on time, which meant staff wouldn’t get paid. We were able to organise funding of £160,000 within five days, meaning his employees got their Christ mas pay check and he got to breathe a sigh of relief.

3. No Added Debt: With spot factoring you are simply advancing the speed at which you get paid. The work has been done and the invoice sent and once the client pays, you are back to scratch with the invoice financier. On the other hand, with a bank loan you are adding external debt to your company, which will need to be repaid with interest over a fixed term, meaning you will still be repaying the debt long after the loan was approved.

Is Spot Factoring for You?
It is important to highlight that spot factoring is not for everyone. In general it is a service that is reserved for businesses selling to other businesses. More importantly, you should really only consider spot factoring if you have reliable customers and your business is fairly well established and almost certainly on the growth curve. While gaining access to capital remains possibly the biggest hurdle most SMEs are likely to encounter in growing their businesses, the range of financing options available today is far greater than ever before. The best piece of advice I can offer any person requiring a cash injection for their business is to consider all your options and decide what works best for you.