How invoice factoring works, step by step

Invoice factoring turns receivables into cash. The mechanics are simple once the vocabulary is clear.

1. You invoice your customer

You deliver a product or service and invoice your customer on your normal terms. Your customer is called the account debtor, because it owes the invoice.

2. You submit the invoice for funding

You submit the invoice along with supporting documents, such as proof of delivery, a signed timesheet or a bill of lading. A group of invoices submitted together is often called a schedule.

3. The invoice is verified

The factor confirms that the invoice is valid and that the goods or services were delivered. Verification can include confirming details directly with your customer.

4. You receive an advance

Once approved, you receive an advance, which is a percentage of the invoice value. The advance rate is set in your agreement. The portion not advanced is held as a reserve.

5. Your customer pays the factor

Your invoices carry a notice of assignment, which instructs your customer to pay the factor. When payment arrives, it is applied to the invoice.

6. The reserve is released

After payment, the reserve is released to you, less the factoring fee. Fees are usually calculated on the invoice value and may depend on how long the invoice remains outstanding. Your agreement defines exactly how.

Recourse and nonrecourse

In a recourse arrangement, you remain responsible if your customer does not pay an invoice. In a nonrecourse arrangement, the factor assumes defined credit risk, usually the customer’s insolvency, under conditions set out in the agreement. Read the definitions carefully. They vary between agreements.

What good looks like

A well run factoring relationship feels predictable. You know what has been submitted, verified, funded and collected at every moment, you understand every fee before it is charged, and your customers experience a professional, courteous process.