Invoice Factoring Explained
This article covers the details of how an invoice factoring facility is setup, what due diligence is done and how the line is used on a day to day basis. If you need basic information about the product, please read what is invoice factoring before reading this article. But in summary, invoice factoring is a financing tool that helps companies that have cash flow problems because of slow paying corporate customers. An intermediary company, called a factoring company, finances your invoices and provides liquidity to your business. The main collateral for the transaction are your accounts receivable, and therefore this solution works well for companies with limited assets.
Basic account setup
The first step in the process to set up your account is to determine if your company is a good candidate for factoring. If you are, you should submit an application package along with all the requested materials. One of the most important documents you will need to submit is the accounts receivable aging report, which shows a listing of your clients along with their outstanding amounts. This last report is critical in determining your pricing terms.
With this information in hand, the factoring company will perform the due diligence to ensure that there is a good fit between the companies. They will check the commercial creditworthiness of your clients, and they will also check if your invoices have any encumbrances or if your company has any tax problems which could affect funding.
Once the due diligence is finished, the company will provide you with a financing proposal. And if accepted, a contract will be executed and your account will be setup. One important step of setting up your account is sending a notice of assignment to your clients. This document advises your clients that payments need to be remitted to a new address and informs them of the financing relationship.
Most invoice factoring transactions are funded using a two installment funding format. The initial installment is called the advance and covers 85% of the gross value of your accounts receivable. This installment is provided as soon as the work is completed and the invoice is verified with your client for accuracy. Usually advances are provided the same day you request them or shortly thereafter. The remaining 15% is rebated as a second installment, less the invoice financing fee, once your client pays in full. Most transactions look like this:
- You submit your accounts receivable using a schedule of accounts
- The invoices are verified (all or a sample of them)
- The advance is provided - 85% is wired to your account
- Your client pays, 30 to 60 days later
- The rebate is provided - 15% (less costs) is wired to your account
The cost of the transaction is usually assessed during the rebate, though this varies for larger and more complex transaction. The finance rate and advance rate are determined by the creditworthiness of your customers, the size of your accounts receivable and your customer's credit profiles. On average, most lines are priced between 1.5% to 3% for every 30 days. The rate is often accrued in fractional increments such as 0.75% for every 15 days.
Rates as low as 1.5% Advances as high as 85% for qualified clients
Get an online invoice factoring quote or call (866) 730 1922
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