How Does Factoring Work?

Factoring works when a factoring company provides work capital to a business that has unpaid invoices from creditworthy clients. The business can get up to 90% of the invoice amount the same day.

First: Your company provides goods or services to creditworthy customers and provide correct invoices.

Second: Your company sells it’s unpaid invoices to an invoice factoring company.

Third: A factoring company verifies the invoices and then funds your business with an immediate payment of up to 90% of the received amount the same day.

Fourth: Customers make payment directly to the factoring company according to the terms of the invoice. The factoring company then returns the balance of the paid invoice minus a fee.

The Factoring Process Explained

Learning How Factoring Works

Want to learn more about factoring and how it works? Check out a more detailed overview of the factoring process:

  • Apply for factoring to qualify- Once a factor receives your factoring application, it is reviewed that business day. An executive contacts you to discuss your financial needs and goals. Upon approval, the factoring company sends a proposal outlining their terms and rates. Upon your agreement, the factoring company will overnight the legal documentation.
  • Due diligence – When the legal documents are executed, the factoring company completes a due diligence background check. Remember, the primary concern is with your company’s credit; the factor relies on your customer’s ability to pay. The due diligence work takes about 3-5 business days to complete.  Due diligence work consists of checking for Uniform Commercial Code liens, judgment search, tax lien search, Dun & Bradstreet search, and various other corporate searches.
    Once the searches are complete, funding can begin immediately.  After that, as soon as the factoring company receives and has verified your invoices, you will receive funding within 24 hours.
  • Provide the invoice – One invoice copy can be submitted to the invoice factoring company.  Mail your customer the original invoice and fax us a copy along with proof of performance and delivery and any other supporting documentation.  In most cases, the factor will notify your customers to send payment to us directly. Fill out the assignment schedule sheet provided by us.  The company president must sign it.  When completed, attach it to the invoice that you are submitting.  This is used as a cover sheet to your faxed invoices and is forwarded to the data entry department so that they can enter your invoices into the computer, and you can see them on your account 24 hours per day.
  • Funding/Wire transfer- Per your discretion, the factor can send funds via wire transfer or check (regular mail or overnighted). Please keep one copy of the assignment schedule of accounts and invoices for your records. Funds are given in advance following verification of the invoices.  This is usually completed the same day the invoices are received.
  • Credit approval for new accounts is easy, and it’s recommended to call in advance for credit checks before shipping goods or providing services to new accounts.  All that is needed is the name and address of the new customer.
  • Submit to us all of the customers you would like to factor so they can be credit-approved for funding.  Include the contact name and phone number.
  • Send us invoices with their purchase order (if applicable) and proof of delivery or performance.  The goods must have been delivered or service performed.
  • Invoices are verified, and money is immediately advance via wire transfer, up to 90% of the gross invoice amount. Payment of the invoices is made directly to the factoring company from your customers.
  • Once payment is received, the factor provides the remaining amount, minus their fee. The final factoring rate and cost don’t have to be confusing. Click here to calculate factoring rates, fees, and cost.

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