What Documentation Do I Need for Factoring?
What documents do I need to factor in an invoice? A factoring company typically will want to see legal documentation that your company is a legitimate business. This includes articles of incorporation.
They also want to see a list of your customers and an accounts receivable aging report. Lastly, they will require your personal identification.
Like bank loans, factoring companies analyze your customer’s credit before buying your invoices. They also check for lines against your business.
“Todd Rowe, President of BitX Capital, says, ‘When it comes to factoring your first invoice, BitX Capital is your trusted guide and consultant. All you need is your AR aging report and a sample invoice, and we can get you up to 90% of the face value of the invoice.
Don’t let slow-paying customers hold you back from growing your business—we’re here to help accelerate your cash flow and support your success every step of the way.'”
Factoring Application
Factoring is a financial service that helps ventures become more flexible by allowing them to sell their outstanding invoices for immediate cash.
The resulting funds are used to finance physical or investment expansion, accelerate progress on projects or meet other short-term business needs that cannot wait for traditional financing options like bank loans.
Depending on the factoring company, you may be asked to provide a variety of documentation to qualify for their services. Some of the most important include your company’s tax identification number and articles of incorporation.
The tax ID proves that the business is a legitimate entity and that it pays its taxes on time, which makes it a more trustworthy partner.
Articles of incorporation also document the company’s legal form, such as a corporation or limited liability firm. Additionally, a factoring company may require you to provide an accounts receivable aging report, profit and loss statements, balance sheets and bank or deposit account statements.
Business Formation Documents
When a factoring company begins the process of underwriting, they’ll often want to see documentation that shows you’re a legally documented business.
Typically, this includes a copy of your articles of incorporation. The factoring company may also request your federal ID number and the names of owners. This information helps them get to know your company better and ensures they are working with the correct people.
Factors will also want to know your company’s industry and customer base. They’ll often check to make sure your customers are creditworthy and that you don’t have any lines or bankruptcy proceedings.
Some factors are more lenient when it comes to start-up companies or those with slow-paying clients, but they will still likely do extensive checks to mitigate any risks.
They may also ask you to sign a Tax Information Authorization or Form 8821, which gives them access to your company’s tax records.
While this may seem odd for a form of financing that doesn’t rely on your creditworthiness, it’s common practice across all funding industries.
Customer List
A factoring company will want a snapshot of your business’s customer list, including the creditworthiness and payment history. This allows the factor to make an informed assessment of the amount of risk they’re willing to take on your invoices and determine your specific factoring rates.
Depending on the industry, this may include proof of delivery or service, work orders, invoices, and more. The documents verify that your business has completed the work and delivered goods or services to your customers, which helps confirm the value of your outstanding invoices.
Unlike traditional bank loans, which often require collateral and a prolonged application process, factoring focuses on the creditworthiness of your business clients, as they are the ones who will ultimately pay your invoices.
This makes it easier for businesses with poor personal or business credit to qualify for invoice factoring than other financing options like lines of credit.
Invoices
Depending on the invoice factoring company you choose, you may be asked to provide a list of your customers and an accounts receivable aging report.
You’ll also likely sign a factoring agreement. These documents will typically state the contract terms, factors rates and any other fees associated with factoring.
You will need to have valid invoices that prove you have provided a service or sell goods to your clients. Factors prefer to work with established businesses that have been in business for several years and are generating significant revenue.
They are also interested in your customer’s credit rather than your business’s credit history.
You will also need a business bank account since many factors do not allow you to transfer funds to personal bank accounts. They will send money via wire or ACH to your business account only.
You will need to provide a government-issued tax ID, a social security number or a business tax ID to validate your company’s legal status and to check for outstanding liens.
Financial Statements
The process to obtain a line of credit from a bank can be lengthy and complex, while factoring companies are often able to quickly assess invoices and approve or decline them within a few weeks.
A typical factoring application will ask for a list of customers and accounts receivable aging reports, as well as the business owner’s financial statements.
Factors also want to see that the company is a legally documented entity, such as articles of incorporation. This helps them verify that the company is a real business and that they can be held accountable for paying taxes.
Additionally, factors may require that the company has the legal right to sell its goods. That usually means a copy of the business licenses.
Factors will also want to know if any of its assets are pledged as collateral, such as tax or judgment liens. The lender will need to resolve these liens before the invoices can be factored.
Bank Statements + Contracts and Agreements
Your factoring company will want to verify your business is legitimate. Early in the process, they may request legal documentation like your articles of incorporation and tax ID number.
They may also ask for a list of customers you plan to factor in, as they will want to see the customer’s creditworthiness and whether they have good payment histories.
In addition, you will likely sign a contract with the factoring company, which will spell out all the details of the transaction, including how disputes are handled.
It is important to look for clauses pertaining to governing law, how disputes are settled, and who will collect from your clients. For instance, some factors will take over collections from your customers, and others may allow you to retain that control.
The factoring agreement will also spell out the terms of the sale and purchase of your accounts receivable. It will usually state how much of each invoice will be advanced upfront and how much will be held back – a reserve amount – until your client pays or the factoring fee is repaid.
Final Words!
Invoice factoring becomes much simpler when you collaborate with BitX Capital. We offer access to a wide network of reliable lenders who can help you secure the financing you need.
By partnering with us, you can streamline the process and find the best prospects to meet your business’s financial requirements. Call now and speak with a loan specialist at 203-763-1430 ext. 101 or Apply Now
FAQs
What is invoice factoring?
It is also known as accounts receivable factoring, a financial transaction where a business sells its unpaid invoices to a factoring company at a discount. Rather than waiting for customers to pay, the business receives immediate cash flow.
How Does it Work?
The process typically involves submitting unpaid invoices to the factoring company, which then reviews the invoices and advances a portion of the invoice value (usually up to 95%) to the business.
The factoring company receives payment from the customers, and once the invoices are paid, the remaining balance is released to the business minus a factoring fee.
What Are the Benefits Attached with This Financing?
It provides immediate cash flow, helping businesses manage their working capital more effectively. It also reduces the time and resources spent on collections and can improve the business’s ability to take on new projects or orders without waiting for previous invoices to be paid.
Who Can Use Invoice Factoring?
Almost any business that sells goods or services to other businesses (B2B) can use invoice factoring. This includes industries like transportation, staffing, manufacturing, and more.
Even startups and businesses with less-than-perfect credit can qualify, as approval is based on the creditworthiness of their customers.
What Are the Costs Associated with It?
The primary cost is the factoring fee, which is a percentage of the invoice value. There are several factors that can affect the factoring fee, including the industry, creditworthiness of the customers, and the number of invoices factored.
Other services, such as invoice verification or account management, may also have additional fees.