From application to funding: Invoice Finance
Invoice factoring, also known as invoice finance, receivables finance or debtor finance, is a
usefultool. It facilitates the flow of cash for businesses and allows them to access funds immediately. Here, we will discuss the process, from application to funding, and the benefits it brings to companies of all sizes.
1. Understanding Invoice Factoring
Before diving into the process, let’s briefly recap what invoice factoring or invoice finance entails. Invoice factoring is a financial service for businesses provided by specialised companies known as factors, invoice factors or invoice finance companies. These factors purchase the rights to outstanding sales invoices from businesses to make advances against those invoices, providing immediate cash in return. Essentially, invoice factoring allows businesses to convert their accounts receivable into instant working capital to utilise in their business.
2. Application and Documentation
The first step in the invoice finance process is the application stage. To apply for invoice finance, businesses need to provide certain documentation, including:
- Invoices: The primary requirement for invoice factoring is having outstanding sales invoices from creditworthy customers. These invoices serve as collateral for the funding.
- Debtors ledger: The detailed debtors ledger shows sales activity on the applicant and gives the funder an insight into average invoice size, payment conduct and spread of customers.
- Customer Information: Businesses are usually required to provide details about their customers, including contact information, payment history, and creditworthiness.
- Business Documentation: Factors may request business-related documents such as financial statements, bank statements, articles of incorporation, and tax returns to assess the financial health and legitimacy of the company.
3. Due Diligence and Approval
Once the application and documentation are submitted, the factor conducts a comprehensive due diligence process. This involves verifying the creditworthiness of the applicant business as well as its customers, assessing the quality of the outstanding invoices, and evaluating the overall financial stability of the company.
Factors evaluate various factors during the due diligence process, such as the aging of invoices, concentration risk (reliance on a single customer), the industry in which the business operates, and the likelihood of invoice disputes or chargebacks. Based on this assessment, the factor determines the maximum advance rate (the percentage of the invoice amount that will be provided as immediate funding) and the fees and charges associated with the factoring service.
4. Agreement and Notification
When your application is approved, you and the factor establish a factoring agreement. This document outlines the arrangement’s terms, including fees, advance rates, notifications, and other specifics.
After signing the agreement, you input your invoices into the factor’s software and share copies of these invoices with them. Usually, the factor informs the customers whose invoices are involved, confirming that upcoming payments should go to the factor. The extent of disclosure—whether the factor’s role is disclosed or kept confidential—depends on the agreement and your business’s preferences.
5. Verification and Funding
After the notification is sent, the factor verifies the authenticity of the invoices with the customers. This verification process ensures that the invoices are valid, accurate, and undisputed. It helps prevent fraud and ensures that the factor is financing legitimate transactions. It also helps protect the client form spurious or unjustified disputes.
Upon successful verification, the factor provides the agreed-upon funding to the business. The amount funded is typically a percentage of the total invoice value, minus the factor’s fees. The funding can be disbursed through various methods, such as direct bank transfers, virtual wallets, or other electronic payment systems.
6. Collection and Account Management
After the funding, factors often assist in collecting payments from your customers. Reputable factors manage this process tactfully, ensuring it doesn’t harm your client-customer relationship. This support can ease your administrative load tied to accounts receivable and let your business concentrate on its main operations.
Factors have skilled account managers who engage with customers. They ensure timely payment collection and handle any invoice disputes or problems. These managers uphold a professional and respectful customer relationship, representing both the factor and your business.
7. Reserve and Final Settlement
In the factoring process, the factor sets aside a part of the funds as a reserve. This reserve acts as a safeguard for possible invoice disputes, chargebacks, or customer insolvencies. When the invoices are fully paid, the factor releases the reserve amount, after deducting fees or adjustments, to your business.
Once all outstanding invoices are collected, the factor reconciles any remaining balances with your business. At this point, you receive a detailed account statement from the factor. This statement details transactions, fees, and adjustments made throughout the factoring period. Many factors offer online software accessible round the clock, ensuring complete transparency for clients.
From application to funding, the invoice finance process presents a flexible, efficient path for businesses to improve cash flow and access working capital. Partnering with a reputable factor allows businesses to leverage their accounts receivable, enabling growth, stability, and enhanced financial control. Understanding the steps involved in the process empowers businesses to make informed decisions and harness the benefits of invoice factoring to drive their success.