The Factoring Lifecycle
While the concept of factoring is simple, understanding the exact lifecycle of a factored invoice is crucial for business owners. Let's break down the mechanics.
The Setup & Due Diligence
Before you factor your first invoice, you establish an account with the factoring company. The factor will run a background check, verify your business, and most importantly, run credit checks on the customers you intend to bill. Once approved, an agreement is signed detailing the factoring rate and advance rate.
Delivery & Invoicing
You complete the work or deliver the goods as usual. You generate an invoice, but instead of sending it directly to your customer, you submit it to the factoring company along with proof of delivery or a signed timesheet.
Notice of Assignment
The factoring company sends a "Notice of Assignment" to your customer. This simply informs the customer that the invoice has been assigned to the factoring company and that payment should be remitted to a new lockbox or bank account.
The Advance
The factoring company verifies the invoice and immediately advances a percentage of the total value to your bank account (typically 80% to 90%). The remaining 10% to 20% is held in a "reserve" account.
Payment & Reserve Release
After 30, 60, or 90 days, your customer pays the invoice in full to the factoring company. The factoring company takes their agreed-upon fee (the "discount rate"), and remits the remainder of the reserve back to you.
A Financial Example
- Invoice Value: $100,000
- Advance Rate: 90%
- Factoring Fee: 2% per 30 days
- Day 1 Cash Advance: $90,000 (You get this immediately)
- Amount in Reserve: $10,000
- Day 30 Customer Pays: $100,000
- Factoring Fee Deducted: -$2,000
- Reserve Released to You: $8,000
- Total Cash Received: $98,000
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