Should I sell an unpaid invoice via spot factoring or to a debt purchaser?
Spot factoring (offered by Hydr and Triver, among others) advances part of an invoice now, and you get the rest, less fees, when your customer pays, so you keep most of the invoice's value. It suits solvent customers and recent invoices. Selling the debt to a debt purchaser gets you a one-off payment, usually well below the invoice value, and the purchaser takes over collection with no further involvement from you. It suits old debts, customers in difficulty, or getting a debt off the books.
What this means for your business
If a customer owes you money and cash flow is tight, you have two very different routes. Spot factoring is a short-term cash advance against a specific unpaid invoice, you get most of the money quickly and the finance company chases the customer for payment on your behalf, with you keeping the bulk of what is owed once it is collected.
Selling to a debt purchaser is different, you hand over the debt permanently for a fixed, much smaller sum and walk away entirely, with no further chasing, no further upside, and the debt off your books for good. The right choice depends on whether the debtor is solvent and likely to pay, and whether you want maximum cash now or maximum cash eventually.
Key points
- Spot factoring suits invoices from solvent customers who are simply slow payers rather than distressed or insolvent.
- Selling to a debt purchaser suits old, written-off, or distressed debts where recovery is unlikely through normal means.
- Spot factoring keeps the finance company chasing the customer, which can affect that commercial relationship going forward.
- A debt sale is final, once sold you lose all rights to any further recovery even if the customer later pays in full.
- Spot factoring typically returns far more of the invoice value overall, but only if the customer is likely to pay.
Common pitfalls
The biggest mistake is sending a good, recoverable debt to a debt purchaser out of impatience and losing most of its value for pennies in the pound. The reverse mistake is spot factoring an invoice from a customer who is already in financial difficulty, since the fees and chasing costs can outweigh what is ever recovered.
Always check whether the finance company's chasing approach fits how you want your customer treated, some are firmer than others. Read the contract for what happens if the customer disputes the invoice or pays late, recourse terms vary between providers.
Related questions
Can I use spot factoring for just one invoice without signing up to a full facility?
Yes, that is the main point of spot factoring, it is designed for single invoices on an ad hoc basis rather than your whole sales ledger. This makes it different from a standard invoice finance facility, which usually covers all your invoices under one ongoing agreement.
Will my customer know I have sold or financed their invoice?
With spot factoring, yes, the finance company usually contacts the customer directly to collect payment, so it is not confidential. With a debt sale, the debt purchaser will also contact the customer directly once ownership of the debt has transferred to them.
What happens if the customer disputes the invoice after I have used spot factoring?
Most spot factoring is offered with recourse, meaning you may have to repay the advance if the invoice is disputed or remains unpaid past an agreed point. Check the specific terms before agreeing, as recourse conditions vary between providers.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam was managing director of Penny, a UK invoice finance business, from July 2020 to November 2023. His career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library. Career record.
Last updated: