Updated: Sep 14
Collecting the payments and invoices that your customers owe to your business is a stressful process, especially if you are a small business owner. The more time your customers require to pay your invoice, the harder the things become for you. And it becomes even more nerve wrecking when the outstanding invoices become threatening to the financial health of your startup or business.
Fortunately, an easy solution to this problem is “invoice factoring,” providing business owners free up cash flow on their unpaid invoices. All that businesses need to do is to sell their receivables to any factoring company. The factoring company then collects the payments from the customers on behalf of the business. But how exactly does the invoice financing process work?
Typical invoice factoring is done through a semi-complicated process, and if you want to learn about it more, we have you covered here. This guide breaks down invoices factoring in a step-by-step process to help you make an informed decision for your business. Before plunging into the process of invoice factoring, let's do a quick rundown on what invoice factoring is and how it can help your business with working capital.
What Is the Invoice Factoring Process?
Invoice factoring is an easy way to keep the cash flow of your business running. It is an excellent deal for both i.e. the business facing the problem of late-paying clientele, and the factoring company getting a premium for the collection service and funding. Businesses sell their outstanding invoices by using account receivable factoring. Business owners apply for account receivables in a factoring company. The company (on meeting terms and requirements) buys outstanding invoices and collects payments from the customers. In many cases, the factoring companies take on the debts that businesses have and collect from their customers on businesses’ behalf. However, in most invoice financing cases, factoring companies do not collect debts. Even then, startups or small businesses get cash or funding to solve the cash flow problem.
A Typical Invoice Factoring Process
Many factoring companies buy invoices in two short installments. They cover 80 percent of the receivable amount in the first installment (the amount may vary). They rebate the remaining 20 percent of the factoring fee once the invoices are paid by the clients. This basic process has four steps:
Businesses submit their invoices to be purchased
The factoring company sends an 80 percent advance
The customer pays in 30 to 60 days
The factoring company then sends businesses the remaining 20 percent
However, before a business begins to finance its invoices, selecting a finance company and setting up an account are two mandatory steps.
Step 1: Find a Factoring Company
The process of invoice factoring typically begins with finding a factoring company that suits your financing needs the best. Luckily, there are many providers who have years of experience in this field. You need to see if that experience is relevant to your industry and if it can work for your customers. Evaluate all your options and select the factoring company that helps you meet your cash flow target, Porter Capital is one of the best-reviewed factoring companies available to businesses who are looking for working capital.
Step 2: Set up a Factoring Account
Once you choose the factoring company, set up an account with it. Setting up an account with the factoring company is relatively easy. Review all your legal documents and contracts before signing them. Once it is done, the factoring company sends assignment notices after filing a UCC statement. This process does not take more than three days if your legal documents are complete.
Step 3: First Installment Payment
After making an account, your business is ready to receive funds. You can sell your receivables to the factoring companies by submitting accounts schedule. It compiles a list of invoices that your business wants to sell. When a factoring company receives the accounts schedule, it verifies your businesses invoices to send an advance amount. Your business receives the first installment after verification, and that may range from 80% to 90% percent of the gross value.
Step 4: Get the Rebate
As mention earlier, the rebate is the remaining amount and the second installment. The factoring company pays the remaining 10 to 30 percent of invoices, depending on the amount of initial advance. Remember that different factoring companies handle rebate differently. Some companies distribute your partial refund when the customers pay the full amount, while others simply rebate by providing weekly payments.
Step 5: Continued Invoice Financing
Businesses factor it's invoices regularly. As we said earlier, it is an easy way to maintain a steady cash flow. The ongoing invoice factoring is not only relatively simple but it also provides businesses with a predictable cash flow. The option is even more beneficial if you own a business that has a seasonal sale. With the help of invoice factoring, you can get advance funds for your business to manage business expenses, payrolls, and inventory.
Is There a Factoring Fee on the Invoices?
Invoice factoring is a two-way process that benefits both businesses and factoring companies. To answer the question precisely, yes, factoring companies charge a premium for providing advance funds, which only makes sense considering the entire banking industry is built on this principal. One of the best parts of using invoice factoring is that you can negotiate the factoring fee with the company you choose, Porter Capital offers some of the most competitive invoice factoring rates in the industry. The factoring fee is a set percentage and it is usually based on a predictable amount of your unpaid invoices. Plus, the factoring fee can also be based on the customer’s creditworthiness. That means if your customers take more time to pay the due invoices, it may influence the factoring fee.
Here is an example of how a typical invoice factoring process could look like;
A customer has to pay you $10,000 invoice
You factor $10,000 invoice by signing an agreement with a factoring company
The factoring company verifies your business and sends your 90 percent (first installment) of that invoice ($9,000)
The remaining amount of $1000 is rebated by the company
The customer makes $10,000 payment to the factoring company
The company charges its factoring fee, (3 percent, $300)
The company sends the balance of $700 of your invoice to you
You receive a total of $9,700
Overall, the invoice factoring process is simple and straightforward. You can receive easy advance funding regardless of the size of your business as long as you have invoices or accounts receivable with business clients. If you have any questions or would like to apply for invoice factoring or business financing, do not hesitate to reach out to the experts at Porter Capital using the webpage found here.