Here is a step-by-step of receivable factoring – the funding process:
Account Establishment: The first step in the funding process is getting your account established with the factoring company. This could be a relatively quick and painless step or a long and complex procedure. Ideally, once you complete the application and fax the required documentation which normally consists of invoices and an accounts receivable aging report, the factoring company will send your application to an underwriting, to establish documentation drafts the contract. Once terms are acceptable and the contract is signed, factoring should be ready for starting. This whole process can take anywhere from 3-5 business days.
Create Invoices: Once your company has delivered goods or services to your customer you can start selling us invoices. You can either send the original or fax copy of the invoice to us to process. The requirement of an original invoice is dependant upon the type of industry you service. Example: Trucking companies can factor invoices once their loads have been delivered. The trucking companies debtor almost always requires an original invoice and bill of lading before they will remit payment. Therefore the trucking company must overnight the original invoices with backup documentation to the factoring company’s operations center for funding the following day.
Funding the invoices for Factoring: Once your account is established factoring company wait for you to sell us your invoices. When you need cash just send over your invoices to be factored. Factoring company’s operations staff will take 10-30 minutes to verify the invoice and the creditworthiness of your customer. If your invoices make the wire deadline you will be funded that day.
Credit Approval: All invoices must have credit approval which is a quick and necessary process. It is designed to protect the customer from incurring too much bad debt. Factoring company’s processing department will normally run a credit check on the debtor. Once approved a credit limit is set and the credit it updated on an ongoing basis.
Funding Advance: Once credit is approved you will be wired the advance. The advance is usually between 70% and 90% of the original invoice amount. You can then use this money for payroll, vendors, taxes, or business operating capital.
Collections: The Factor does the administrative work of processing eventually collecting payment on the invoice. A notice of assignment is typically sent to the account debtor instructing them to remit payment to the Factor when the invoice is due. Once the payment comes in from the debtor and the check settles the transaction is closed.
Reserve Release: Once the transaction is closed the reserve, which is the percent not funded minus the factoring fee will be released back to the company. Now you are ready for the process to happen all over.
A worth note: Invoices do not need to be sent in for factoring the day they are created. You can age or seasoning the receivable up to a month with the goal of lowering your factoring fees. The factoring fees start the day your invoice or schedule of invoices was funded. Example: Your top customer usually pays on day 45 even though you have extended them 30 day terms, however your business doesn’t need funding immediately. You can season the invoice for 15 days and then send it to be factored. If the invoice pays on day 45 your factoring fee will be half of what they would have been if your had factored it immediately.
You may want to read the following sub-topics too:
A basic explaination about receivable factoring.
Types of factoring available in the market place.
Learn what advantages and disadvantages of factoring are.
A basic explaination about common fees of factoring, how it is structured, explained with case example for easier understanding.
A considerable guidance on how to choose a right factoring company to meet your need.
Additional worth consider tips for factoring buyer.
Jargons commonly used in factoring world.