The answer to the question of what is factoring receivables is very simple. Factoring provides a cash advance from a third-party, the factor, to a business invoicing customers on the typical 30, 60 or 90-day terms.
This is not a loan, and there is no need to provide collateral or a personal guarantee. Instead, the factor considers the creditworthiness of your customers in determining if they will factor the invoices. When taking a closer look at what is factoring receivables, this is an essential distinction.
The process is very simple from the business perspective. The steps are as follows, with full transparency into the process and the fees a critical part in choosing the right factor to work with.
Complete Project and Invoice Customer
It is important to understand that factoring only occurs after the work is completed and the customer is invoiced. The question of what is factoring receivables starts with having accounts receivable in hand. A factor cannot work off a contract or a working agreement until an invoice has been generated with payment terms in place.
Apply to Factor
This is usually done online and will take just a few minutes to complete. The application just requires basic information about your business and the invoices you wish to factor. This application approval is often completed in just a few hours and typically not more than one business day. Invoices are then submitted when the application is approved.
Receive Initial Funds
Depending on the agreement with the factor, your business will then have a wire transfer directly into your business account in a matter of days. Even for a first time application, this is usually completed in three to five business days.
Receive Final Funds
Finally, once your customer has paid the invoice to the factor, the factor deducts their fees. The remaining amount is then forwarded to your bank account, completing the transaction.
It is important to choose a factor that offers the best rates, doesn’t have additional hidden costs, and that will not require long-term contracts.