How Invoice Factoring Works
If you are looking for a cash flow management solution that avoids opening new debt and your business relies on invoice accounting, factoring might just be the best choice. For those who have never worked with a factor, it is basically the process of selling your invoices to a third party for collection. This has the side effect of outsourcing your receivables and reducing the administrative overhead you deal with. For businesses that are essentially sole practitioners or freelancers, this can be an essential labor-saver as well as a great way to normalize the company’s income cycle.
1. Find Your Factor
This niche is a wide one, and there are a lot of options when it comes to terms of sales for your invoices. Some factors only work with clients who sell all their invoices at once. Others cater to businesses looking to sell invoices selectively and less frequently. There are even factoring agencies that work with specific industries, offering terms that cater to their unique business cycles in ways that a one-size-fits-all sale agreement can not.
2. Make Contact
Sometimes factors and accounts receivable financing firms offer online applications to consolidate your information and put you in touch with someone who can review your receivables. It’s just as common to see a contact number or email and no application, though. Many companies in the fieldwork by email, reviewing your PDF invoice copies, and communicating personally about the process of verifying and approving the sale. Either way, most of the process revolves around those invoices and not your credit report or debt to income ratio.
3. Submit Invoices
You’ll need to send in the invoices you intend to sell, with all the customer contact information. Some factors also want customer payment histories and other pieces of financial information from your records. The more information a factor asks for, the more accurately the risk of buying those invoices can be assessed. When your customers pay on time and value their relationships with you, that means getting more of the face value of each invoice. Verification typically involves making contact with the customer to confirm the debt before moving forward with the sale.
4. Sell Your Invoices
The last step is to close the sale agreement. There should be no surprises if you picked a factoring agency that makes its terms clear from the outset, so it should be a simple matter to review the paperwork and sign. Once you’ve closed the agreement, the money is sent to you and your customers are directed to make payment to the factor. That’s all there is to it.