Last Updated on January 19, 2021
An increasing number of businesses are discovering the advantages of invoice factoring, the biggest of which is quick access to capital. Anyone who has applied for a business loan through a bank understands how cumbersome and lengthy the process can be, often taking weeks for approval. Compare that to three or four business days for approval and funding through invoice factoring and it’s not surprising that many businesses are now using it as their default source of capital.
The invoice factoring approval process is much more streamlined and far less cumbersome, offering businesses more flexibility and security in meeting their cash needs.
However, the approval process can differ among the various factoring companies, with varying costs, requirements and timelines. It would be important to know how the process should work and what to expect when you contact a factoring company so you can make the proper comparisons.
While the process is typically quicker and easier than traditional bank financing, applying for invoice factoring services still requires thoroughness and attention to detail. The more prepared you are, the more smoothly the process will go, which means quicker access to the cash your business needs.
Here’s how the approval process works:
Once you’ve received your quote from a factoring company, there are four basic steps until you get your cash.
1) Request a Quote
When you contact a factoring company for a quote, you may speak with an invoice factoring services specialist to discuss the options available to you based some initial questions about your business’ financial history and needs. You should be prepared to provide some information about your business, such as:
- Number of current customers
- Your average monthly revenue
- Number and amount in outstanding invoices
- Current or past liens or judgments against your business
If you’re not asked for this information in your initial call, you will certainly be asked on the application.
Before they can provide you with a rate quote, you will need to complete an application and provide supporting documents.
2) Submit Application and Supporting Documents
This is where the invoice factoring approval process can vary among companies. Some companies charge an application or due diligence fee while others charge nothing. In most cases, the application process takes place virtually – online, through phone calls, faxes, and email. It is important to be thorough in your application to avoid back and forth phone calls asking for clarification. In addition to the application, you need to submit supporting documents, including articles of organization or incorporation, bank statements, copies of current invoices, and a payables aging report.
Some factoring companies may provide an initial rate quote upon receiving the applications but it won’t be confirmed until everything has gone through the underwriting process.
3) Factor Underwriting
The factoring company reviews your application and documentation to determine your rate. There is typically no credit check because the factoring company is mostly concerned with the creditworthiness of your customers. So, much of their due diligence is spent looking into their payment histories. In most cases, underwriting is completed within a day or two and the factoring company will notify you of your approval.
4) Establish the Factoring Account and Get Funding
When you are approved, the factoring company sets up a factoring account to handle the transactions. Once established, your factoring account can be used for all future invoice factoring.
When you sell your invoices to the factor, it submits a notice of assignment and then provides a cash advance of up to 90% of invoice face value. The remaining funds are held in a reserve account until the factor receives payment from your customer at which point it deducts its factor fee and remits the balance to your business.
Funds are typically available to your business within one to two days of approval.
Factoring is All Downhill From There
That’s it. A simple and straightforward process taking less than four days to complete. Going forward it gets even easier to access capital for your business. With your factoring account already established, all you need do is submit a new invoice and funds can be available as quickly as one to two days.
At altLINE, we pride ourselves on our highly streamlined and professional invoice factoring process. There are no hidden fees and, as a direct funding source, our clients save on their borrowing costs. We invite you to review more information about the ins and outs of by reading our guide to small business factoring.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.