How Does Invoice Factoring Work?
Step 1 – Submitting Invoices for Factoring
The process of factoring receivables starts with invoicing. The way invoicing works is similar to a business’s normal invoicing process. For any service rendered or goods provided by a business, an invoice is created at some point. However, instead of sending the invoice directly to the customer, the business would forward it to the invoice factoring company. From that point, you can let the factoring company do all the work.
Step 2 – Notifying the Debtor
Accounts receivable factoring companies take on the responsibility of notifying the debtor regarding the sale of the invoice, and informing them that all future payments should be remitted to the factoring company. This notification is sent to the debtor in writing and is known as a ”Notice of Assignment.”
The account manager then confirms the validity of the invoices to make sure that the customer is satisfied with the services that were rendered or the goods that they received. This is simply done by checking delivery confirmations or signed purchase orders, as well as a quick customer follow-up by telephone. The next step, and particularly the most exciting for business owners, is the purchase of invoices and advancement of funds.
Step 3 – Advancing Funds to Your Business
Normally, up to 98% of the face value is advanced within the same day of invoice purchase. This process transfers the ownership of the invoice to the factor and provides immediate financing to the business. In the meantime, the business owner now has the funding to fill other orders, purchase supplies, pay employees and any other expenses that may come up.
Step 4 – Collection of Payments
The customer then remits payment to the factoring company for processing. When the factoring company receives payment from the customer, you will receive a rebate of any remaining balance minus a minimal factoring fee. The process is that simple.
As you can see, the accounts receivable factoring process is not difficult to understand. If you’re ready to begin the process of working with a factoring company, give us a call today.