Factoring Invoices - Explained in Detail
This article will help you understand how factoring works. If you need general information about its benefits, you may want to consider reading what is factoring financing first. As a quick summary, it's a solution that helps companies that have run into working capital problems. These problems are caused because they have to offer term credit, the option to pay an invoice in up to 60 days, to their customers but can't afford it. This solution finances open invoices and provides companies with immediate funds to pay for operational expenses. It has a number of advantages, especially for companies that don't have a lot of collateral and can't get other types of financing.
Once you have determined that you want a factoring facility, your next step is to submit an application package to the finance company. Each company has their own set of procedures but will often ask for an application, supporting documents and an accounts receivables aging report. The factoring company uses the receivables aging report to determine the size and credit quality of your invoices, which affects the terms that you will get. As part of their due diligence, they will also check for liens against your invoices and tax liens against your company. These could affect their ability to offer funding.
Once they complete their due diligence, they will offer a proposal. Once it's accepted and the contracts are signed, you will be ready to start using your line. However, before you get the first funding, the finance company will send a notice of assignment to advice your customers of the new payment address and other details.
How a transaction works?
Most invoice finance transactions are structured using a two payment model. The accounts receivable finance company buys your invoices in two installments, called the advance and the rebate. The advance covers about 85% of the invoice and is provided as soon as the invoice is accepted by your client and verified. The advance is often sent the same day, or shortly thereafter. The rebate covers the remaining 15%, less any facility costs, and it's wired once your customer pays in full. Most transaction work as follows:
- You complete the work and invoice your client
- You submit your invoices to the finance company
- All or some of the invoices are verified
- They wire the advance - 85% of the invoice. Often the same day.
- After 30 to 60 days, your clients pay
- The factoring company wires the remaining 15% (less costs) rebate
Once you have set up the line, you can follow the above process to get your invoices funded on a regular basis. Most companies will give you the flexibility to request fundings daily, while others will insist that you bundle invoices and limit your requests to a couple times per week.
You should consult with your accountant or CPA to determine how much your should factor. As a rule of thumb, you should factor enough to cover you current operating costs, plus an additional amount to use as a reserve to cover unexpected events.
How is cost calculated
In general, the cost of financing invoices depends on a couple of variables. They are the credit quality of your corporate clients, the size of your receivables, the diversity of your invoices and other factors. In general, most lines cost between 1.5% to 3% per 30 days. The cost is often deducted from the rebate.
Most factoring companies can be flexible when determining you rates and there are some things you can do to get the best possible rates. You should submit a complete application, present a summary of your company, and present your company accurately, but in a positive light.
Rates as low as 1.5% Advances as high as 85% for qualified clients
Get an online factoring quote or call (866) 730 1922
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