It is a surprising fact that invoices or accounts receivables can be sold to a commercial finance company. Isn’t it?
Since an invoice is not a physical good, per se, and it’s hard to imagine how a factors purchase accounts receivables.
How do factoring companies purchase accounts receivables?
When a client sells an invoice to a factor, they are actually selling the financial rights associated to that invoice. The sale is made in exchange for an immediate payment.
The first step to sell your receivables is to submit an application and all materials to the accounts receivable factoring company.
Although, each company has its own application process, most factoring companies ask for almost similar set of documents. Once the application is received, the factoring company reviews it through a process called due diligence.
Due diligence involves reviewing of the application, determining if the invoices can be purchased, and examining the creditworthiness of applicant’s customers.
The process can take from one day to one week, depending on the complexity of your company. Coral Capital Solutions has technology enabled operations and can complete the process within a day.
If everything goes well and the application is approved, the applicant signs a formal agreement that allows the factor to purchase accounts receivables in exchange for an immediate payment. The amount is usually 80% of the value of invoices.
Just two more steps before the factor purchases invoices. First, a Notice of Assignment (NOA) is sent to the customers whose invoices are getting financed. The NOA, a common document in the industry, advises customers of the factoring relationship.
The second step is to verify the invoices. In this step, the factor verifies that the invoices are still open and due. Once this step is completed, the factor is ready to purchase the first batch of invoices.
Buying of Receivables
Simplest of all the steps. The actual purchase is usually done online through a website portal or via email. The document exchanged is schedule of accounts which contains list of accounts and their invoices that are being sold to the factoring company.
Once this document is received and processed, the factoring company does a transfer of the funds.