Four Steps in Understanding the Accounts Receivable Process

Even though companies can benefit greatly by factoring their invoices, many small and large businesses do not because they are unfamiliar with the invoice factoring process and the cash flow solutions that it provides.  Historically, accounts receivable factoring is one of the oldest type of financing that provides working capital to help businesses and solve their cash flow needs.  Below are four steps in summarizing the accounts receivable financing process.

*  Goods Delivered, Services Rendered, Submit Invoices for Factoring –   The beginning procedures for invoice factoring is not much different from a company’s normal invoicing process.  After the goods/products have been delivered, or services has been rendered and accepted by the customer, the business creates an invoice.

Instead of sending the invoice directly to the customer, they would forward it to the invoice factoring company for funding.  This is usually done electronically by emailing copies of the invoices along with any back up paperwork (purchase or sales orders, time sheets, delivery confirmations, etc.) to his/her assigned factoring account representative. Some factoring companies may also offer their client companies to be able to “upload online” their invoices directly to the factor’s secured online portal for faster processing times.

*  Factoring Company Notifies and Verifies with Customer – The first thing that the factoring account representative does is process the new Schedule of Accounts and invoices – then mails out the invoices to the Customer (Debtor).  A Debtor is the business or organization who purchased the goods, or requested the services rendered and has agreed to pay your company for those goods or services.

Next thing the account representative does when he/she receives a new Schedule of Accounts is to look for new Debtors.  If the account representative sees a new Debtor, he/she will notify the Debtor in writing that the invoice has been sold to the factoring company, and as a result of the sale, payments should be remitted to the factoring company and not your company.  This notification in writing is a letter known as a “Notice of Assignment”.

In most cases, if there are no new Debtors, the account representative simply confirms the validity of the invoices with the Debtor by verifying that they have received the goods or services that has been rendered to their satisfaction.  This step can simply be completed by reviewing delivery confirmations, or signed purchase orders, in conjunction with  a quick phone call and speaking with the person who ordered the goods or services and verifying that they are happy with the products and/or services that they have ordered.

*  Funds Advanced on Eligible Invoices – Once the account representative confirms that the Debtor has received and is satisfied with the goods or services that they have requested, and he/she has notified the Debtor’s accounts payable on where to send payments, the next step is to purchase the invoices and advance the funds.  This process can usually be completed within 24-48 hours after receiving the invoices unless there is an issue with the Debtor.

*  Payments Received, Rebates Dispersed – At the time of notification (Notice of Assignment), the Debtors are instructed to send payments for the ordered goods or services directly to the invoice factoring company.  When the factoring company receives the payment, the initial advance is deducted in addition to the factoring fees (Discount Fee).  The remaining balance (Rebate) is dispersed back to the Client Company.  Sometimes, this “Rebate Release” (Back-End Monies) is distributed to the client company the day the “funds clear” (Clearing Period) the factoring company’s bank account.  Sometimes there are predetermined Rebate Release days (i.e. every Friday, the 15th and 30th of the month, etc.).  It depends on the policy of the factoring company when the Rebate Reserve is actually released – this would be outlined in the factoring agreement.

As you can see, invoice factoring for businesses is not complicated.  In fact, it is quite simple and can be summarized into those four simple steps.  The business owner delivers the goods or performs the services for his/her customer and sends the invoice to the invoice factoring company.  The account representative, processes/mails out the invoice, completes the notification/verification process and then collects payment on the invoice.  In the meantime, the business owner receives cash up front to fill the other orders, purchase supplies/inventory or pay his/her employees.