Invoice Factoring: What is it &  How it works?

Invoice factoring is commonly referred as accounts receivable factoring, accounts receivable financing or debtor finance. Invoice Factoring occurs when a business sells its accounts receivable (invoices) to a third party (eg. factoring companies) at a discount. Factoring companies provide cash advance to businesses 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.

How do you begin financing your invoices?

Step 1: Finding a factoring company

There are many factoring houses in Malaysia (eg. CapBay). 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 and submit a list of documents to the factoring house for due diligence and credit assessment. Commonly requested documents include director’s IC, bank statements, audited report, management accounts and sample of invoices. Factoring companies will assess all these documents prior to approval. This 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 factoring house by submitting an early payment request. Businesses will have the option to select the early payment date (the date the business would like to be paid rather than waiting for 30-90 days).

Thereafter, the factoring house will verify the invoices and remit the advance amount less any financing charges into your account upon approval. The advance amount is normally within 70-80% of the invoice amount. The remaining will serve as reserve amount. This 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 any additional charges from the reserve and forward the remaining balance into your account.