What Does a Factoring Company Do?
Do you often ask yourself what is a factoring company? Do you wonder if a factoring company could improve your company’s financial circumstances?
As you learn more about what a factoring company does, it’s easier to determine if it’s worth further exploration.
In simple terms, a factoring company pays you upfront for your invoices, thus providing you with consistent cashflow. This is in contrast to the traditional process of waiting for clients to pay and attempting to collect when they don’t.
Now that you understand the basic premise, let’s dive into the five steps of invoice factoring:
5 Steps of Invoice Factoring
1. Provide Your Service
Just the same as you always have, you provide your customers with your service. Nothing changes here and it remains the most important step of the process. Providing a quality service allows you to generate new invoices, which results in money coming into your bank account.
2. Submit Your Invoices to the Factoring Company
Traditionally, you would send your invoices directly to your customers. From there, the waiting game begins. While some customers are happy to pay in full and on time, some are notoriously late. This can create various issues for your business, as you may not have the cashflow you need to grow.
3. Receive Payment
This is the best part of invoice factoring. You no longer have to wait until your customer pays your invoice. Also, you’re not responsible for collecting payment from them. Instead, your invoice factoring company pays you up to 95 percent of your invoice on the day it’s submitted. And the best part is that you don’t have to worry about collecting payments anymore.
4. Your Customer Pays the Factoring Company
You provide the factoring company with the terms and conditions of your agreement. This allows them to seek payment from your customer based on those terms. For example, if an invoice is for $25,000, NET 30, your factoring company considers this during its collection efforts.
So, not only are you receiving payment upfront, but you’re no longer responsible for collecting on invoices. This can save you and/or your accounting department both time and money.
5. Remaining Funds are Returned to You
Once your customer pays the factoring company in full, remaining funds — for instance, five percent — are returned to you, less a small fee. This marks the completion of the process for that particular invoice.
What You Need to Get Started
Despite the many benefits of invoice factoring, companies like Revolution Capital who provide these services require specific information from your customers. This generally includes the following:
- Information about your company, such as the number of years in business, annual revenue, and industry.
- Basic details about your invoices, such as the terms and conditions and average amount.
- Your three most recent business bank statements.
Unlike a loan, invoice factoring companies do not require you and/or your business to have good or excellent credit. This is because you’re not borrowing money.
But Do You Qualify?
Now that you understand what you need to apply, you can turn your attention to the minimum requirements. This varies from one factoring company to the next but typically includes:
- Proof that your company is a B2B service provider.
- Clear and clean audit trail.
- No accounts receivable liens.
- Proof of creditworthy debtors.
- Invoices of $10k +
The factoring company you choose can walk you through the application process. Fortunately, once your business is approved and you have an account, your workload is minimal. At that point, your only responsibility is to submit new invoices as you generate them.
Frequently Asked Questions
When it comes to your company’s finances, there’s no room for error. There’s never a good time to “guess and hope for the best.” If you have any questions about invoice factoring, it’s critical to clear the air before deciding for or against it.
Here are five questions you should strongly consider asking an invoice factoring company:
Knowing how many invoices you can submit allows you to plan in advance, which is essential to maintaining the cashflow needed to keep your business in good health. Along with this, request information on the value of the invoices approved for submission. For example, some companies may have a minimum and maximum while others do not.
Every invoice factoring company charges a fee for their services. Knowing the fee upfront provides a clear understanding of how much money you’ll receive for each submitted invoice.
Tip: this is an important detail, but don’t shop on price alone. Your primary focus should be the reliability and reputation of the factoring company.
Invoice factoring companies do their part in ensuring that you only work with creditworthy debtors. However, should one of your clients neglect to pay in full — or at all — you need to know what happens next.
A simplified onboarding process goes a long way in making it easier to get started with invoice factoring. Once you know what the company needs, you can collect the necessary information and provide it for their review.
Note: depending on the value of the invoices you’ll be submitting, your factoring company may require additional information and verification. The larger the invoice the greater the risk for the factoring company.
Now that you know what an invoice factoring company does and how it can benefit your business, there’s only one thing left to do: get started.
If you’re ready to learn more about invoice factoring or take the first step in the process, contact Revolution Capital online or via phone at 1-855-489-0310. As a leading invoice factoring company, we’re here to answer your questions and provide professional service every step of the way.