How Invoice Factoring Works – In 5 Easy Steps

by Pathlie Lee Business consultant

Invoice factoring allows you to receive funds quickly and turn your cash flow situation around. If you’re in a financial crunch, you can assign unpaid invoices to a factoring service, and the company will pay 80 percent of the invoice upfront. Once your customer pays up, the company will send back the remainder of the invoice to you, minus the fees. If you’re wondering how it works, this step-by-step guide will walk you through the basics. By the time you reach the last step, you should have more than enough familiarity with how the process works. That will help you better understand your options when you look for a company to provide the funds you need.

Send an Invoice to Your Client

You send an invoice for products or services rendered. Most invoices must be payable within 90 days by the customer if you want those invoices to qualify for invoice funding canada solutions. Keep that in mind when you work out your extended payment terms.

Choose an Invoice Factoring Company

Look for an invoice factoring company. Find one that you can trust. Once you have chosen, you will need to send your invoice for approval. If you receive approval, your invoice meets the company’s eligibility criteria. You will receive financing. Don’t be surprised if the company carries out a background check on your invoiced customers, too. They need to know if your customers are good credit risks. 

Sell and Assign Invoices

Once you know where to go for invoice factoring funding, you can sell or assign your invoices. However, the company often gives out a discount rate. That rate is dependent on whether you have credit-worthy clients or not. If you want to make the most out of that discount rate, it is best to use customers with an excellent payment history when using invoice factoring services. That will help you save on costs. It will also help establish a good relationship with the factoring company.

You Receive an Advance

The factoring company will send you an initial advance once you submit your invoices, depending on the advance rate both parties must initially agree on. Typically, the advance rate in the industry is 80 percent of the invoice’s value, commonly referred to as the borrowing base. The size of your transaction will determine how much the advance is. Risk parameters, your industry, and more will also affect the amount of the advance you get.

Your Client Receives a Notice

Your invoiced client will receive a notice of assignment from the factoring company. It tells them that you assigned the company with the invoices and that they will receive future payments for the invoices you issue.

Your Clients Pay the Factoring Company

Your client sends the payment to the factoring company, compliant with the invoice’s terms. The factoring company will then collect on all the assigned invoices.

You Receive the Rest

Once the factoring company receives the final payment, you will receive the remaining balance of the invoice, which is referred to as the reserve amount. Of course, the fees will be deducted from the remainder of the payment.

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About Pathlie Lee Advanced   Business consultant

6 connections, 1 recommendations, 136 honor points.
Joined APSense since, September 12th, 2017, From NY, United States.

Created on Nov 13th 2022 02:21. Viewed 72 times.


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