How Invoice Factoring Works
Accounts Receivable factoring is not a regular business loan. It is a sale of your invoices to a factoring company which in return gives you the money you need today.
Usually, you get paid in two different installments. You receive the first installment (also called an advance,) as soon as you sell the invoices to the factoring company. Then, you get the second installment (also called the rebate) as soon as your client pays the invoice to the factoring company.
How much you get paid in the first installment depends on several factors like the factoring company you deal with, how much money you produce in invoices every month, and how reputable are the companies issuing the invoices.
You can expect the first installment to be between 70% and 95% of the value of the invoice. Once the account has been set up, you receive this money in as little as 24 hours. The remaining money is kept by the factoring company as a reserve in case of disputes.
To summarize, this is how the process works once you have established an account with an accounts receivable factoring company:
- You provide a service or goods to your client and issue an invoice
- You sell that invoice to the factoring company who will advance between 70% and 95% of the invoice as the first installment. To do it, you just need to send copies of the invoice to the factoring company.
- Once the invoice is paid (usually after 30 to 60 days,) the factoring company gives you the second installment which equals the remaining balance minus a small percentage financing fee for the service provided.
As you can see, once the account with the invoice factoring is created (which takes a few days,) you can access money within 24 hours by submitting copies of the invoices. It’s a simple process used by countless companies around the United States and Canada.