Since invoice factoring is only provided to businesses, it must have some kind of legal business structure. You'll need to submit evidence of this, such as a deed of incorporation, a charter, or a DBA filing with the state. You must also have a business bank account and a tax identification number. Another document required for factoring is an accounts receivable expiration report.
This report lists unpaid invoices, credit notes, and notes by date. Accounts receivable expiration reports may also be referred to as an accounts receivable program or simply a schedule. It's important to note that only B2B companies (business-to-business OR business-to-government) are eligible for factoring. Not suitable for retail companies.
Once your application is accepted and you have a one-factor account, you can access an online portal to find lists of invoices. You can review paid, unpaid and funded bills and inform the lender of the specific accounts receivable you want to fund. If the customer is high-risk, the factor may refuse to buy that invoice or to charge them a higher preferential rate to mitigate the financial risk that the customer doesn't pay.
Invoice factoringrequires your customers to have a business-only account where they can send their bank transfers or ACH.
When you offer a sales invoice, the factor wants to know that the customer to whom it belongs has a reasonable credit risk. The factoring company verifies its customer's credit rating and payment history before purchasing the bill or allowing it to be used as collateral. Factoring financing is an attractive solution if your customers take more than 30 days to pay their bills. You can get advances for a large percentage of your accounts receivable within a few days of sending a new invoice, so you'll have cash available to meet your business goals.
Another requirement for bill factoring is a government-issued tax identification number, generally called a social security number. Factoring companies use customers' customer credit and payment history as a primary consideration when advancing bills. In general, if your company is in a fairly good financial situation and your customers pay on time, you can find a factor to buy your bills and advance your cash quickly. Factoring is an advance on an open invoice, not a loan, so credit focuses on the customer's customer and their ability to pay the bill.
However, your customers must have an excellent credit history, especially when it comes to paying their bills. The more information you provide when filling out an application, the more accurate the invoice factoring quote will be, so be as detailed as possible. Typically, entrepreneurs can resort to invoice factoring when they can't qualify for a traditional type of financing, such as a bank loan or a corporate line of credit.