How Does Factoring Work?

A Quick Summary of How Factoring Works:

Factoring works when a financing company provides working capital to a business that has unpaid invoices from creditworthy customers. The business can get up to 90% of the invoice amount the same day if you are a service-based company. Hard products will receive up to 80% of the invoice the same day. The balance of the invoice is paid once the customer pays in full.

The Factoring Process Explained

The Factoring Process

STEPS ON HOW FACTORING WORKS

Step 1 – Invoices Into Cash

Your company provides goods or services to creditworthy customers. It takes them 30-90 days to pay the invoice. You need to get paid immediately to keep cashflow positive.

  • You sell the unpaid invoices to a factoring company and get immediate payment up to 90% with the balance coming once your customer pays in full.
  • Once a factoring company receives your application, it will be reviewed within one business day. An account representative will contact you to discuss your financial needs and goals.

Step 2 – Verification

The factoring company verifies the invoices and completes a due diligence background check. Remember, the primary concern is 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.

  • Upon approval, the factoring company sends a proposal outlining their terms and rates.
  • Upon your agreement, the factoring company will overnight the legal documentation.
  • Your company submits valid invoices on a delivered product or service.
  • You will fill out the assignment schedule which lists the batch of invoices.
  • You can see the invoice schedule and payments in your account 24 hours per day.

Step 3 – Same Day Cash

Once the searches are complete, funding can begin immediately.  After that, as soon as the factoring company receives and verifies your invoices, you will receive funding within 24 hours.

  • 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.

Step 4 – Balance Received

Your customer pays in full directly to the factoring company according to the terms of the invoice.

  • Per your discretion, the factor can send funds via wire transfer or check (regular mail or overnighted).
  • Businesses receive the funds in advance following verification of the invoices. This is usually completed the same day the invoices are received.
  • Once the factor receives the payment, 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.

Step 5 – Repeat

Repeat when you have new invoices for continued, unlimited working capital!

Additional notes to remember.

  • Make sure to send invoices with their purchase order (if applicable) and proof of delivery or performance.  There must be a delivery of goods or the performance of a service.
  • You may submit all of the customers you would like to factor so they can be credit-approved for funding.  Include the contact name and phone number.
  • Credit approval for new accounts is easy. Also, 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.

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