How Does Invoice Discounting Work?

The process of invoice discounting is fairly straightforward. Here's a step-by-step guide to how it works:

Step 1: Apply for Invoice Discounting

The first step in the invoice discounting process is to apply for financing with a factor. Factors typically require businesses to meet certain eligibility criteria, such as a minimum level of annual revenue or a history of creditworthiness.

Step 2: Choose Invoices to Sell

Once you're approved for invoice discounting, you'll need to select the invoices you want to sell to the factor. Generally, factors will only purchase invoices that are less than 90 days old and are owed by creditworthy customers.

Step 3: Send Invoices to Factor

After you've chosen the invoices you want to sell, you'll need to send them to the factor for verification. The factor will confirm the validity of the invoices and the creditworthiness of your customers.

Step 4: Receive Cash Advance

Once the factor has verified the invoices, they will provide you with a cash advance. This advance is typically around 80-85% of the total value of the invoices you've sold.

Step 5: Customer Pays Invoice

When the invoice is due, your customer will pay the full amount to the factor, rather than to your business. The factor will deduct their fee from the payment, and the remaining amount will be returned to your business.

Step 6: Factor Pays Remaining Balance

After the factor has deducted their fee, they will pay the remaining balance of the invoice to your business.