(800) 276-1500info@primaryfunding.com
  • E-Factor
  • Apply
Free Consultation
  • About
    • About Us
    • Management Team
    • Operations Team
    • Sales Team
    • Client Testimonials
  • Services
    • Accounts Receivable Financing/Factoring
    • Asset Based Lines of Credit
    • Bridge and Term Loans
  • Community
    • Serving Our Business Community
    • Client Spotlight Videos
    • Events
  • Resources
    • Lending Terms
    • FAQ
    • Newsletter
  • Partners
  • Contact Us

How Does Invoice Factoring Work?

September 19, 2018 by Primary Funding

Invoice Factoring 101

If you’re interested in factoring but aren’t sure how it works, then you’re in the right place. It’s critical you understand the entire process to help alleviate any concerns that are natural when it comes to borrowing money from non-traditional sources.

You’re right to be doing your research.

Let’s walk through the process of how factoring works for a small business in need of additional financing. Below are the steps from start to finish for this small business.

1. As a small business, you invoice your customers

Once you have provided products or services to your B2B or B2G (Business to Government) customer, you issue an invoice for them to pay you. Often, to qualify for factoring, these invoices must be payable within 60 days.

2. You Sell & Assign the Invoice to a Factor

After doing your research, you find a Factor you want to work with and go through the process. Below is an example of a typical factoring process and what you can expect:

  • Have a general conversation to determine whether the factoring company is a good fit for your business (and you for theirs).
  • If it is a good fit, you would complete an application and provide all of the requested information. Generally, the requested information includes – AR Aging, AP Aging, Customer List, Sample Invoice, Purchase Order (“P.O.”), and Proof of delivery (“POD”).
  • Factor will do their due diligence and research your company, this can include business & personal credit checks, credit check debtors, evaluating invoices and corresponding backup documentation (P.O. & POD’s).
  • If all of this information checks out, then Factor will connect with you to better understand your business and billing cycle.
  • Factor will then evaluate the level of risk with you, and issue a Term Sheet if the Factor is interested in moving forward.

The Term Sheet defines the details of your financing.

3. The Factor Pays You an Advance

The Factor gives you an initial advance called an advance rate. The advance rate is generally around 80% of the value of the factored invoice. The amount of your advance depends on the size of your transaction, your industry, and other risk parameters.

At this point, the Factor may also send out a “notice of assignment” to the clients you have chosen to factor, or they may ask you to do so. The notice of assignment states that your company has assigned the Factor as the entity to receive future payments for invoices you issue them. All payments will go to a lockbox account (like a designated account for the factored invoices to be paid) which is set up by the Factor.

Some industries are more accustomed to invoice factoring than others. Trucking and shipping companies commonly use freight factoring and staffing companies and recruiting agencies use staffing factoring. In industries where factoring is common, telling a client you’ve assigned their invoice might not be a problem.

If factoring isn’t common in your industry, you will want to make sure you clearly communicate it with your clients. This is often the biggest hurdle for our clients to get past. Factoring doesn’t indicate a weakness of the company. The majority of the time, factoring can be a positive sign of business growth.

4. Your Client Pays the Factor

Your client will pay the Factor according to the terms of the invoice. This means you no longer have the responsibility of collecting on these invoices and following up with clients. You can take the financing and get to work on your business!

5. The Factor Forwards You the Remaining Balance (Minus Fees)

After receiving payment from your client, the Factor will give you the remaining balance of the invoice, called the reserve amount, minus their fees.

Invoice Factoring Costs & Qualifications

Invoice factoring is a good working capital solution for businesses of many different ages and sizes, as long as you have qualifying invoices. Many factoring companies will even work with you if you’re a startup. The typical fees and overall costs can be tricky to understand, and it’s incredibly important that you do.

Now that you know what to expect, you can see that it is a very straightforward process.

If you want to learn more, reach out to the Primary Funding Team. We can answer your factoring questions and get you started through the process!

Filed Under: Factoring, Small Business Financing Tagged With: factoring, financing

Recent Posts

  • A Warm Carlsbad Welcome
  • Catching Up With Richard Gendron, President of Primary Funding
  • Sunset Bay Candy offers “Sweet” Business Gift Ideas!
  • PFC’s Lending Products
  • Q&A With Diane Severson, Primary Funding’s VP of Miscellaneous

NEWSLETTER ARCHIVES

Archives

  • May 2022
  • March 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • November 2018
  • October 2018
  • September 2018
  • August 2018
  • July 2018
  • June 2018
  • May 2018
  • April 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • May 2017
  • April 2017
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015

About

Primary Funding Corporation provides Alternative Business Financing Solutions to businesses. We help companies in just about every industry ranging in size from start-up to $25 million in revenue. Our financing products include Accounts Receivable Financing, Asset-Based Lines, and Equipment Loans. Loans made or arranged pursuant to the California Finance Lenders Law, License 6034157.

Latest

A Warm Carlsbad Welcome

Between connecting and celebrating, our recent open house … Read More

Catching Up With Richard Gendron, President of Primary Funding

My how time flies! It’s already March! How has 2022 been for … Read More

Community

Primary Funding supports Community organizations such as the North Hispanic Chamber of Commerce

contact

2173 Salk Avenue, Suite 150
Carlsbad, CA 92008

T: (800) 276-1500 • P: (858) 530-1500

F: (858) 536-5577 • E: info@primaryfunding.com

connect

Copyright © 2022 Primary Funding. All rights reserved.

Privacy Policy | Developed by TinyFrog Technologies

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Reject
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Non-necessary
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.
SAVE & ACCEPT