Invoice Factoring: What is it &  How it works?

Invoice Factoring: What is it &  How it works?

By CapitalBay


Invoice factoring is commonly referred as accounts receivable factoring, accounts receivable financing and sometimes known as debtor finance. Invoice Factoring is when a business sells its accounts receivable (invoices) to a third party (factoring company) at a discount. Factoring company provides cash advances upfront to business against assignment of the account receivables. The factoring company then takes over the task of collecting the receivables as and when they fall due. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. It might also factor their invoices to mitigate their credit risk.



How do you begin financing your invoices?


Step 1: Finding a factoring company

There are many factoring houses in  Malaysia. Each factoring house offers different types of factoring. Generally, it can be categorized into two types i.e. recourse factoring and non-recourse factoring. Evaluate your options and select the best factoring house for your business.


Step 2: Onboarding

You need to prepare some documentation such as director’s IC, 6-month bank statements, 3 years audited report, a sample of invoices and others.  Factoring company needs these documents to conduct due diligence and credit assessment. These processes may take two to four days depending on your circumstances.


Step 3: Getting your Funding

Under normal circumstances, businesses will sell their account receivables to the factor by submitting an early payment request which states the early payment date. Early payment date is the date of which a business would like to get its funds earlier rather than waiting for 30-90 days credit term.

Thereafter, the factor will verify the invoices and remit the advance amount into your account upon approval. The advance amount normally is within 70-80% of the invoice amount. The remaining serves as reserve amount and it will be returned to your account after the receivables have been collected from the paymaster / awarding party.


Step 4: Getting your reserve amount

After collection of payment, the factoring house will knock-off the interest charge from the reserve, and then credit the remaining balance into your account. Sometimes, factoring houses will issue a rebate to the second installment of the transaction and can be for 5% to 10% of invoice depending on the size of your initial advance.

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