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 Procedure: Steps Involved in Factoring
1. First, you have to qualify and formally establish a relationship with a factor. That typically takes a few days to a week. A critical part of the due diligence process is doing credit checks on customers whose invoices you want to factor. If their credit rating is good to excellent, you are almost assured of qualifying. However, if none of your customers have a good rating; your business will not qualify for factoring. In addition, as part of our due diligence process, we will run a criminal background check on you. Although we really don’t care about your credit rating, it is important for us to know what type of person we are potentially getting involved with. Once a factoring relationship is established, you can obtain cash within a day.
2. The customers whose invoices you want to factor will receive a simple one page document called a Notice of Assignment. This informs your customer that your company has established a line of credit, secured by your accounts receivable. Consequently, all payments are to be sent to the factor.
3. To sell an invoice, you send us a copy. Within hours, we typically deposit 85% of the invoice amount directly into your bank account. For example, if the invoice was for $1,000, we would advance $850. In essence, the advance functions like a huge down payment on the sale of the invoice. The actual sale price of an invoice can’t be determined though until your customer pays. Once we receive payment, the accrued discount can be calculated. For example, assume the discount turns out to be exactly 5%. That would be a $50 off of a $1,000 invoice. In other words, we would end up paying you $950 for an invoice with a stated face value of $1,000. To arrive at this figure, we add the discount ($50) to the advance ($850) to determine how much of the $1,000 payment belongs to us ($900). The remainder ($100) gets rebated back to you.
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