How Invoice Submission in Factoring Works

Are unpaid invoices slowing down your business? Invoice factoring can turn those receivables into cash flow fast. However, the key to a smooth and successful factoring experience lies in how you prepare and submit your invoices. Below, we’ll explore how invoice submission in factoring works and cover some tips to help you breeze through the process.

Preparing for Invoice Submission

Presently valued at over $3.8 trillion CAD and expected to reach over $6.4 trillion in the next few years, the factoring market is experiencing exponential growth, according to the Business Research Company. But tapping into this powerful funding solution is a bit more involved than just handing over a stack of unpaid invoices. To maximize the benefits and streamline the process, preparation is key. Before we get into invoice submission, let’s take a quick look at some of the prep work involved. 

Eligibility Criteria for Invoice Factoring

Before diving into factoring, you’ll want to confirm that your business and invoices qualify. Here’s what most factoring companies look for.

• Your Customers’ Creditworthiness: Factoring relies on the strength of your customers’ ability to pay, not financial standing. If your clients have solid credit and payment histories, that’s a big plus.
• Business Type: While factoring is popular in industries like trucking, staffing, and manufacturing, it’s open to most B2B businesses that invoice other companies for goods or services.
• Invoice Details: Invoices must be for completed work or delivered goods. Factoring won’t cover future or disputed payments.
• Business Stability: Some factors prefer businesses with established operations, but start-ups may also qualify depending on the situation.

Documents Required for Factoring

To get approved and ready to submit invoices, you’ll need to provide key paperwork. While requirements vary, these are the basics.

• Your Business Information: Business registration details (articles of incorporation, GST/HST number).
• Financial Records: Bank statements for the past three to six months and financial statements.
• Invoice Records: Aged receivables report showing outstanding invoices and customer payment history.
• Customer Contracts: Agreements with your clients proving the terms of service or sale.

Selecting the Right Invoices for Submission

Not all invoices are created equal. Choosing the right ones for factoring can make or break your experience.

• Focus on Reliable Customers: Submit invoices for clients with a track record of paying on time. Factoring companies may reject or heavily discount invoices for high-risk customers.
• Consider Invoice Size: Larger invoices often mean better rates, but they must still meet the criteria for completed goods or services.
• Exclude Problematic Accounts: Avoid submitting invoices tied to disputes or late deliveries. They’ll slow down the approval process and might even get rejected.

The Invoice Submission Process

Once you’ve prepared your documents and selected the right invoices, the next step is submitting them to the factoring company. This process is straightforward, but understanding how it works and how factoring companies evaluate your invoices can help you stay one step ahead. Let’s walk through each stage, from submission to receiving your advance.

Submitting Invoices

Submitting your invoices is the official start of the factoring process. Here’s what’s typically involved.

• Choose the Submission Method: Most factoring companies offer digital portals where you can upload invoices directly. Others may accept email submissions or even physical copies, though the latter is rare.
• Provide Supporting Documents: Along with the invoice, you may need to include proof of delivery, purchase orders, or other documents that verify the transaction.
• Confirm Details: Double-check that each invoice includes accurate client information, payment terms, and the correct amounts. Errors here can delay funding.
• Communicate with the Factor: Once submitted, many factoring companies will confirm receipt and start the evaluation process within hours.

How Factoring Companies Evaluate Invoices

Factoring companies don’t just take your invoices at face value. They conduct a thorough evaluation to minimise their risk and ensure you qualify for the advance. Here’s what happens behind the scenes.

• Creditworthiness of Your Clients: Factors will review your customers’ payment histories and credit ratings. A customer with a history of late payments may lead to a declined or discounted invoice.
• Verification of Work or Delivery: They’ll check that the goods or services have been delivered as promised. For instance, if you’re a manufacturing company, a purchase order or proof of delivery might be required.
• Invoice Validity: Invoices tied to disputes, incomplete work, or inconsistent terms can raise red flags. Factoring companies prefer clean, straightforward receivables.
• Concentration Risk: If a large portion of your invoices comes from a single client, the factor might flag this as a risk. Diversifying your customer base can improve your chances.

Understanding the Advance Rate in Factoring

The advance rate is the percentage of your invoice value that the factoring company pays upfront. It typically ranges from 60 to 95 percent, depending on several factors.

What Determines the Advance Rate?

• Industry Norms: Different sectors have different risks. For example, transportation businesses often see higher advance rates than construction.
• Customer Credit: If your customers have excellent credit, you’re more likely to receive a higher advance.
• Invoice Size: Larger invoices might fetch a higher advance rate, but only if they meet other criteria.

When Do You Receive the Remainder?

The remaining balance, minus the factoring fee, is paid to you once your customer pays the invoice. This is known as the “reserve.”

Example Scenario

Let’s say you submit a $10,000 invoice with an 85 percent advance rate. You’ll receive $8,500 upfront. When the customer pays, you’ll get the remaining $1,500, minus the factor’s fees.

After Invoice Submission

Submitting your invoices is just the beginning of the factoring process. Once the factoring company has your invoices, they take over key aspects of managing them, including advancing payments to handling collections. Understanding what happens after submission ensures you’re prepared for the next steps and know how to address any potential issues, like disputes. Let’s break it down.

Receiving the Advance Payment

After evaluating your invoices, the factoring company releases the advance payment. Here’s how that typically works.

Speed of Payment

Many factors offer same-day or next-day payments after approval. If you’re in a time-sensitive industry like trucking, this quick turnaround can open doors.

Payment Amount

You’ll receive a percentage of the invoice value upfront. This is known as the advance rate, and, as covered, usually ranges from 60 to 95 percent depending on factors like your customers’ creditworthiness.

Deposit Process

The funds are deposited directly into your business account, giving you immediate working capital to cover expenses like payroll, fuel, or equipment purchases.

The Role of Credit Control and Collections

Once the advance payment is made, the factoring company typically steps in to manage credit control and collections. This can save you time and resources, but it’s important to understand how it works.

• Monitoring Payments: The factor tracks your customers’ payment timelines and ensures invoices are settled according to the agreed terms.
• Customer Communication: Factoring companies may contact your customers directly to confirm invoice details and remind them of payment due dates. This is standard practice, but letting your customers know beforehand can help maintain smooth relationships.
• Collections Support: If payments are late, the factor takes responsibility for following up. They’ll typically have a professional collections team to handle this efficiently and respectfully.

Handling Disputed Invoices

Disputed invoices can arise for various reasons, from discrepancies in billing to customer dissatisfaction. Here’s how to handle them if they occur during the factoring process.

• Who Resolves the Dispute: Initially, disputes are flagged to you as the business owner. Most factoring companies expect you to resolve the issue since it often relates to your product or service.
• The Factor’s Role: The factoring company may pause payments on the disputed invoice until the issue is resolved. They’ll often provide support, like sharing documentation or offering advice, but the responsibility lies with your business.
• Preventing Future Disputes: Double-check all invoice details before submission. Common issues include billing errors, incomplete services, or missing documentation.

Fees and Costs Involved

While invoice factoring provides a quick and reliable way to boost your cash flow, it’s essential to understand the fees and costs involved. This knowledge helps you avoid surprises and ensures factoring remains a cost-effective funding solution for your business. Let’s break down the two main components: factoring fees and additional charges.

Factoring Fees Explained

The primary cost of factoring is the factoring fee, which is essentially the price you pay for accessing funds upfront. Here’s how it works.

Factoring Fee Basics

The factoring fee is typically a percentage of the invoice value, ranging from one to five percent depending on the agreement. It’s based on how long it takes for your customer to pay the invoice. Faster payments mean lower costs.

Tiered Fee Structures

Many factoring companies use a tiered fee model. For instance, one percent for invoices paid within 15 days or two percent for invoices paid within 30 days.

Flat Rate vs. Variable Rate

Some factors offer flat fees regardless of payment terms, while others charge variable fees based on time. Discuss what works best for your cash flow needs.

Additional Charges You Might Encounter

Beyond the core factoring fee, some companies apply additional charges. It’s crucial to understand these fees before signing an agreement.

Set-Up Fees

Some factors charge an initial set-up fee to cover the cost of onboarding your business. This is typically a one-time fee and can range from $250 to $1,000, depending on the provider.

Credit Check Fees

If the factoring company performs credit checks on your customers, they may charge a small fee for each report.

Invoice Processing Fees

For each invoice submitted, you might encounter a small processing charge, often $1 to $3 per invoice.

Early Termination Fees

If you sign a long-term factoring contract and decide to leave before it expires, you could face early termination fees.

Minimum Volume Fees

Some factors require a minimum volume of invoices to be factored each month. If your submissions fall short, you might be charged for the difference.

Reserve Release Fees

When the remaining balance (reserve) is paid after your customer settles the invoice, some companies charge a small fee for processing the release.

Tips for Managing Factoring Costs

• Improve Cash Flow Management: By improving your cash flow management, you will minimise the need for external funding.
• Negotiate: Many factoring fees and charges are negotiable, especially if your business has strong customers or consistent volume.
• Understand Your Agreement: Carefully read the terms and conditions and ask about any hidden or less obvious fees before committing.
• Choose the Right Provider: Opt for a factoring company with transparent pricing and a track record of working with businesses in your industry.

Simplify Invoice Submission with the Right Factoring Partner

Finding the right factoring partner can make all the difference in streamlining your invoice submission process and improving your cash flow. Whether you’re new to factoring or looking for a better solution, we’ll connect you with a trusted company tailored to your business needs. Take the first step toward effortless invoice management and reliable funding by requesting a free funding estimate today.

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