What is Factoring?

Factoring is the sale of your accounts receivable (invoices) to a funding source at a discount off the face value. The buyer is a funding source known as a factor. Factoring is also commonly known as account receivable factoring or invoice factoring

The reason you would factor your receivable is to receive immediate cash to use for manufacturing or delivering services while waiting to be paid.

The process typically works like this:

You deliver a product or service and issue an invoice to your customer. Without invoice factoring, you could wait 30, 60, or 90 days for payment.

With invoice factoring, the factor immediately purchases the invoice and advances an initial payment of 70-95 percent of the invoiced amount. In most cases, you’ll have funds in your account within 24 hours. When your customer pays the invoice (payment is made directly to the factor), you’ll receive the remaining balance less the factor’s fee.

Typical factoring clients include manufacturers, wholesalers, distributors and service businesses that have the following:

• $500,000 to $50 million in annual sales
• Customers that are credit worthy risks
• Invoices that are verifiable
• Good management and industry knowledge

A quality invoice factoring program will provide other services in addition to capital:

• Credit Analysis – Professional credit analysts assign credit limits for customers.  Credit lines should be constantly monitored and updated.
• Bookkeeping – Customers should be provided the tools for monitoring their accounts. Your daily transactions should be available online through current invoice factoring age reports, collection reports, and reserve reports.
• Funding – Funding should be disbursed by the next business day.
• Collections – An experienced staff monitors your account on a daily basis.