Invoice Factoring Examples

This article offers two examples of how invoice factoring transactions work. It helps you understand how the account is funded, how fees are charged, and how the transaction is settled.

For a detailed explanation of the whole process, from account set up all the way to funding, read “How Does Invoice Factoring Work?

What is invoice factoring?

Invoice factoring is financing tool that allows companies to finance their slow-paying invoices. It works by selling your accounts receivable to a factoring company in exchange for immediate funds. This solution is used by companies that experience cash flow problems because they can’t afford to wait 30 to 90 days for clients to pay. Factoring improves their cash flow, providing funds to pay for business expenses and to make new investments.

Unlike most financing products, factoring financing can be provided relatively quickly. This time frame makes invoice factoring attractive to companies that need funding to handle an immediate cash flow issue.

Invoice factoring examples

The majority of invoice factoring transactions finance invoices in two installments: the advance and the rebate. However, in some cases, invoices are financed as a single-installment transaction. Single-installment transactions are common only in the trucking industry.

In this article, we discuss both types of transactions.

Example #1: Two-installment factoring transaction

In this example, a factoring client has a $100,000 invoice that they need to finance. This invoice is from a pre-approved customer who has great credit and often pays in 30 days or less.

The client gets the following terms from the factoring company:

  • Advance rate: 85%
  • Fees: 2 % per 30 days

Transaction

The two-installment factoring transaction works as follows:

1. The client submits the $100,000 invoice to the factoring company.

2. The factoring company processes the invoice and deposits $85,000 in the client’s account ($100,000 x 85% advance rate).

3. After 30 days, the customer pays $100,000.

4. The factoring company processes the payment and settles the account. The fee for 30 days is $2,000 ($100,000 x 2%).

5. The factor rebates $13,000 (the remaining $15,000 less the $2,000 fee) and deposits the money to the client’s bank account.

Example #2: Single-installment factoring transaction

Single-installment transactions are often used by small trucking companies and are common in freight bill factoring programs. These financing lines are often for smaller amounts and have higher costs.

In this example, a trucking company wants to finance a $1,000 invoice. The invoice is from a pre-approved shipper (or freight broker) who has good credit and often pays in less than 45 days.

The freight factoring company has given the following terms to the trucking carrier:

  • Advance: 95%
  • Fee: 5% for 65 days flat fee

One important detail is that the fee has a flat rate of 5% for 65 days. The fee does not increase as time goes by.

Transaction

The single-installment transaction works as follows:

1. The trucking company submits the $1,000 freight bill and all delivery paperwork to the factor.

2. The factoring company advances $950 ($1,000 x 95%) and deposits the money to the client’s bank account.

3. The remaining $50 ($1,000 x 5%) is the fee. The factor realizes the fee once the shipper pays the invoice in full.

Note that single-installment transactions are relatively simple to understand as long as the shipper pays within 90 days and pays in full. The settlement process becomes more complex if there are underpayments or if the customer does not pay at all. The only exception is if you have a non-recourse factoring program. These programs limit your responsibility in case of non-payment as long the shipper does not pay due to a declared insolvency.

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