Factoring can look complicated from the outside. In practice, it is a simple loop that repeats every time you bill a customer. This chapter walks through that loop and the choices that shape it.
The factoring cycle, step by step
Here is what happens to a single invoice once your account is set up.
- You deliver and invoice. You complete the job or ship the goods. You create an invoice for your customer as usual.
- You submit the invoice to the factor. You upload it through the factor's portal or send it by email. You include proof of delivery when needed, such as a signed bill of lading, a timesheet or a signed delivery receipt.
- The factor verifies the invoice. The factor confirms the work was done and the amount is owed. This may be a quick call or email to your customer, a check of supporting documents, or both.
- The factor sends your advance. After verification, the factor pays you a set percentage of the invoice. The rest is held back as a reserve.
- Your customer pays the factor. Your customer pays on its normal terms, but sends the money to the factor's account or lockbox.
- The factor releases the rebate. Once the invoice is paid, the factor subtracts its fee from the reserve. It sends you what is left. This payment is often called the rebate or reserve release.
Then the cycle starts again with your next batch of invoices.
What happens at each stage
Verification
Verification protects the factor from fake, duplicate or disputed invoices. It also protects you. A dispute caught early is far easier to fix than one discovered 60 days later.
Expect more verification at the start of a relationship and with new customers. Many factors ease up once they see a steady payment history.
The advance
The advance is the cash you get right away. The percentage is set in your agreement and is quoted per client. It depends on your industry, your customers' credit and how often invoices are disputed.
The advance usually goes out by ACH or wire. ACH is cheaper but slower. Wires arrive faster and often carry a fee.
The reserve and rebate
The reserve is the part of the invoice the factor does not advance. It is a cushion. It covers the factor's fee and protects against short payments, deductions or disputes.
Some factors release the reserve invoice by invoice. Others release reserves in batches, such as weekly or monthly. Ask which method applies to you, because it affects your cash flow.
Notification vs. non-notification factoring
One of the biggest choices is whether your customers know you are factoring.
Notification factoring
With notification factoring, your customer receives a notice of assignment. The notice tells them the invoice has been sold and that payment must go to the factor. Your invoices usually carry a "remit to" line with the factor's payment address.
This is the most common setup. It gives the factor the strongest legal protection. Under the Uniform Commercial Code, after a customer receives proper notice, paying you instead of the factor may not count as paying the debt.
Non-notification factoring
With non-notification factoring, your customer is not told about the sale. Payments may still go to a lockbox or account that the factor controls, but the arrangement is less visible.
Non-notification is usually reserved for larger, established businesses with strong records. It often comes with stricter terms, since the factor has less direct contact with your customers.
Which one is right for you?
If you worry about how customers will react, remember that factoring is common in many industries. Trucking and staffing customers, for example, see notices of assignment all the time. Still, it is fair to ask a factor how it contacts your customers and what tone its staff uses.
How long each step takes
Timelines vary by factor, industry and how complete your paperwork is. In general terms:
- Account setup takes the longest. Expect a few days to a couple of weeks while the factor checks your business, your customers and any existing liens.
- First funding often comes soon after setup, once the first invoices are verified.
- Ongoing advances are typically much faster than the first one. Many factors fund within one business day of receiving clean, verified invoices.
- Customer payment follows your normal terms. Factoring does not make your customer pay faster.
- Rebate release depends on your agreement and on how fast your customer pays.
The two things that most often slow funding are missing documents and invoices your customer disputes. Clean paperwork is the easiest way to speed things up.
Spot factoring vs. ongoing factoring
You do not always have to factor everything.
- Spot factoring (also called single-invoice factoring) lets you sell one invoice or a small group. It is flexible but often costs more per invoice.
- Ongoing or contract factoring sets up a continuing relationship. You may agree to factor a minimum volume or all invoices from certain customers.
The chapter on the factoring agreement explains how these choices show up in contract terms.
Frequently asked questions
Will my customer pay faster because I factor?
No. Your customer still pays on its usual terms. Factoring speeds up when you get cash, not when the customer pays.
What happens if my customer pays me by mistake?
Most agreements require you to forward the payment to the factor right away, often within a set number of days. Keeping it can breach your contract. The chapter on the factoring agreement covers misdirected payments.
Can I choose which invoices to factor?
Sometimes. Some agreements let you pick invoices or customers. Others require you to factor all receivables. Ask before you sign.