What is Selective Factoring, and does it Help Your Business?
Is Selective Factoring Available at Bankers Factoring?
According to QuickBooks, over 61% of small businesses are struggling with cash flow – does your business fit this statistic? Working long hours, investing retirement funds, and endless sales calls are part of an entrepreneur’s pain and hustle in a startup.
Small business owners must balance their family and home life while building a company from the ground up. The fast-paced life for startups comes with significant cash flow struggles for business owners.
When startups and small businesses lack the financial strength, history, or credit to secure traditional bank financing, it can be a scary experience. Bankers Factoring removes the uncertainty from your cash flow struggles with our alternative business financing, called non-recourse invoice factoring.
Invoice factoring, also called A/R Factoring and factoring financing, is excellent financing for entrepreneurs to leverage for increased working capital. This article discusses the differences between Spot Factoring and Selective Factoring.
What is Invoice Factoring?
Invoice factoring is a financial transaction where a business sells its accounts receivables (A/Rs) to Bankers Factoring in exchange for immediate cash funding. Companies use this type of alternative financing when they cannot secure traditional bank loans or financing.
A/R Factoring helps small businesses expedite the payment cycle by eliminating the 30, 60, or 90+ day wait to get paid. Small businesses often need to extend credit terms to acquire purchase orders and contracts from commercial clients.
Visit our Frequently Asked Questions to learn more about factoring financing.
What is Spot Factoring?
Spot factoring is a form of factoring financing where the client sells only a single invoice. Typically clients searching for spot factoring need quick working capital for payroll funding, business development, and overhead. You will also see Spot Factoring where companies work once for a B2B customer and never again or infrequently.
Spot Factoring appears like a sound solution for business owners in a stressed financial state. Still, the factoring fees may outweigh the benefits for your business, along with other limitations. Due to the volatile nature of spot factoring, Bankers Factoring provides Selective Factoring, which protects our clients in the long run.
What is Selective Factoring?
Selective Factoring is a form of factoring financing that allows clients to choose which customers and specific invoices to sell and factor. This solution falls in the middle of traditional invoice factoring and spot factoring.
At Bankers Factoring, we partner with our clients to customize a factoring program that they are in control of. Our team of employee-owners understands how vital our financing is for your payroll funding, PO Financing, and business overhead.
What are the downfalls of Spot Factoring?
For business owners in a tight working capital situation, Spot Factoring appears like a good solution. The disadvantages of Spot Factoring outweigh the advantages. Below are some main reasons why Spot Factoring is more costly and risky than Selective Factoring:
- Costly due to high fees.
Spot factoring is a one-time transaction that causes the factoring fee to increase. Since the factoring company cannot spread due diligence costs and financing over multiple transactions, the factor must charge a premium.
- Spot factoring requires large invoices.
Since Factoring depends on volume, a client must sell one invoice for a high dollar amount. Bankers Factoring does not work on Spot Factoring transactions. Some Factoring Companies consider Spot Factoring for invoices only larger than $500,000.
- Spot Factoring Negative Impact on Vendor Relations
When a client factors their invoices, the factoring company sends a notice of assignment. This document informs your customers (the account debtor) that payments must be remitted to a new address. For example, at the end of a Spot Factoring transaction, another notice is sent to notify the transaction is completed. This constant notification places strain on your vendor payables department.
- Run the Risk of Not Receiving Payment with Spot Factoring
Factoring companies invoice financing only a single transaction runs the risk of payment being sent directly to the client. In a selective factoring relationship, the continuous flow of payments makes the process much easier.
Why Do Companies Use Selective Factoring?
Selective Factoring typically makes more sense for companies lacking cash flow as they need substantial funding to close their gaps. Small business owners create a more reliable and consistent cash flow stream by factoring many invoices from multiple customers.
A selective facility gives your company financial control, enabling you to manage your working capital better.
To learn more, visit our previous article, “Why Companies Use A/R Factoring.”
How Does Selective Factoring Work?
Selective Factoring follows the typical factoring financing process. For an invoice financing transaction to begin, the client must have invoices from customers for goods or services that have been delivered. Must invoice financing transactions take place in four steps:
- The client generates invoices for goods or services delivered to customers.
- The client sells their selective invoices to Bankers Factoring.
- Bankers Factoring approves the Selective Factoring transaction and advances up to 92% of the total invoice value the same day
- Bankers Factoring pays the remaining open invoice value less factoring once the account debtor makes payment.
To learn more, visit our previous article, “How Invoice Factoring Works.”
Selective Factoring with Bankers Factoring
Bankers Factoring works with many industries in Selective Factoring. A significant benefit of Selective Factoring is the ability of virtually any industry to utilize invoice financing. Suppose your company has B2B sales or business-to-government sales. In that case, you can develop a factoring program that fits your business need
Advantages of Selective Factoring with Bankers Factoring:
- Same-day funding up to 92% of the total invoice value
- Access to unlimited working capital
- Outsourced A/R Management
- Bad Debt Protection
- We take on the credit risk
- Competitive rates starting at .75%
- Tiered pricing for startups that rewards sales growth
Spot factoring can be expensive and onerous. Selective Factoring from Bankers Factoring is a more flexible and lower-cost alternative.