Invoice factoring is a practice in which a business sells its invoice to a “factoring” company. The factoring company then pays the original business a majority percentage of their invoice. The factoring company will then wait to receive payment from the original client who was invoiced. Once they receive this payment, the factoring company pays the original company the remaining percentage of the invoice, minus a small fee. So, how does a business go about factoring? Keep reading to find out.

Step 1: Create an Invoice

Even when using a factoring company, the original business still needs to be the group that creates the invoice and sends it to the client. Depending on the service your business does, there may need to be a contract saying the client needs to repay the invoice by a specific date.

Step 2: Hire a Factoring Company

The next step is to find a factoring company you are willing to work with. The better your credit, the better your chances of getting to work with one of these companies. Once you find this company, you will need to sign a factoring agreement. This gives the factoring company the right to buy the invoice from you and collect the money from the client.

Step 3: Collect an Invoice Advance

Once the contract between your company and the factoring company is complete, the factoring company will pay you an advance on the invoice. Usually, this payment is about 80% of the total cost of the invoice. The factoring company will do this before it even tries to collect money from the client, so you can be assured you will be paid right away.

Step 4: The Client Pays the Factoring Company

At this point, the invoice is out of your hands. The factoring company will instead get the payment from the client. This means that you don’t need to work with the client much, as far as receiving payment is concerned. You may have the option of telling the factoring company how you usually receive payments, so they do it in the same way.

Step 5: Receive Remaining Payment

When the client pays the factoring company the invoice payment in full, the factoring company will then pay you the remaining amount of the invoice. There will be a small fee for this which will be predetermined when the contract is first set up. When you receive this payment, the factoring is complete!

Keep these things in mind if you are considering trying out factoring for your business. It can be more helpful than you might think.