Invoice Factoring - 101

Factoring / Invoice Financing 101

Invoice Financing is a financial tool that assists business owners to improve their cash flow.  You cannot decide if this tool is right for you, unless you understand how it works, how it benefits you, what it costs are and what the timeframe will be from the time you complete an application to the time that it will take to get funded.

What Is Factoring?

Factoring, also known as accounts receivable financing (invoice financing), is a financial transaction where a business sells its accounts receivable to a factoring company.  The finance company will advance the lion portion of the invoice's face value to the said business.  The percentage that gets advanced is typically decided based on the industry the business is in, the total amount in open invoices the business sells to the factoring company monthly and number of customers the business gives the factoring company.   The balance of this money not advanced will go into the businesses reserve account, where it will remain until the invoices are paid directly to the factoring company by the debtor.  Once the customer pays the invoice, the factor releases the remaining balance in the reserve account and will be sent back to the business, less the factoring fee.

How Does Factoring Benefit You?

  • Improved Cash Flow: Factoring provides businesses with immediate cash.  If you choose to factor your invoices, you will never have to wait 30, 60 or even 90 days to get paid by your customers.  Factoring gaps this timeframe by advancing you your money within 24 hours, after the invoice can be verified for validity.
  • No Debt Accumulation: Factoring is not a loan; you are not taking on any new debt.  All you are doing is selling your invoices at a discounted rate to a factoring company for immediate cash.  Have you ever taken a merchant cash advance (MCA) loan?  If you have you know firsthand that the MCA will deposit a block of money in your account, but they start pulling this money directly out of your bank account daily with huge interest rates.   
  • Risk Relief: The factor assumes the risk of non-payment if your customer becomes insolvent, for any reason.  This means that if a customer defaults on an invoice, only due to bankruptcy, the factor will absorb the loss, not the business.  Have you ever received an order or a job from a new customer, but you are not sure if they are creditworthy?  You should always contact the factoring company before taking on new business from the new perspective customer.  A factoring company is very well equipped to let the business owner know if the new perspective customer is creditworthy. 
  • Net Terms and Collections: Factors have dedicated teams for invoice collection.  Factoring companies are not collection agencies, there is a big difference.  How many times have you or your staff had to contact your customers regarding an overdue invoice?  In one case, you do not want to put pressure on a good customer but on the other hand you need their payment to come in to have access to cash-flow.  The factoring company solves this problem for you.  Once you sell the factoring company an invoice, your account rep will contact your customer if an invoice is past due.  Your account rep will contact your customers (not as a collection agency) to send a gentle reminder on said, overdue invoice.

Process to Get Started:

If you like what you hear and would like to get started with financing your invoices, below are the steps that have to take place and the timeframe that it will take to receive your first funding.

We need you to complete on non-binding pre-application.  After we receive your online application, your sales representative (SP) will run some simple searches on your company.  He/she needs to confirm that your company is open and in good standing in whichever state you started your business.   

Your SP will have to run lien searches on your company.  To sign up with a factoring company, you cannot have any all-asset liens/UCC Filings on your company (if there are all asset liens, there are some possible work arounds for this).  After your SP finishes his/her due diligence an agreement will be sent out to you digitally for you to review and to e-sign. 

After you sign the agreement, you will be sent a follow up email requesting the support documentation that we will need from you, to submit your file to an in-house underwriter for review. 

Within 24-48 hours will be assigned your new account rep, he/she will contact you directly to make an introduction and then start the verifications of the invoices that you submitted to us for purchase, with your customers.  A one time notice of assignment will also be sent to notify your customers that your invoices have been assigned and are payable directly to the factoring company.
After your account rep has verifications of the invoices back, the file will be sent back to the underwriter for the final approval and funding. 

Typically, new customers receive their first funding in approximately one week from the submission of your file to the underwriter from your sales representative.  This can take a little longer if you are slow in submitting the paperwork that was requested or if your customer takes a while to verify the invoices or if there is a buy-out of another factor and or MCA loan.