Factoring: Factoring solutions: a day in the life of an arrangement

Factoring has become a popular cash flow solution: many businesses are now opting to use factoring services as a way of freeing up the cash tied to invoices and ease the strain on cash flow. Whilst there is a lot of technical jargon to work through, the process of factoring is actually very straightforward.

How does a factoring agreement work?

The process works in a few simple steps:

1. Your business provides goods or services.
2. An invoice is raised (therefore the customer is buying on credit)
3. The invoice is sold to a factoring company. This stage may sometimes require a credit approval process either electronically or over the phone.
4. The factor provides immediate payment for the invoice. Depending on the factoring contract, this will be for around 80%-90% of the invoice total, which is the advance rate.
5. Your business receives funds.
6. The factoring company issues a statement to the customer (the account debtor) and collects payment (chasing for however long this takes). Payment will be made to the factoring company’s bank account.
7. The factor maintains a ledger for all invoices and provides bookkeeping services, including reports, recording interest and all money received. This happens at every step.
8. The full amount is received from the customer.
9. Any remaining money can be released from the invoice and a small administration charge will be applied.
10. If the debtor does not pay, the factoring company will find a solution depending on your contract type: with a non-recourse factoring arrangement the funder will not demand money back from your business. However, if a recourse contract has been entered into, the invoice financing company will demand payment back.