How it works

This page will help you familiarize yourself with factoring and how it works. The article is designed to use key terms that are defined in the glossary, providing context on key subjects.

ABC Consulting is a fictional company that provides technical consulting services to large corporations. Their two biggest customers are LARGECO and BIGCO, two well known multinationals. Both LARGECO and BIGCO have negotiated credit terms with ABC Consulting, which allows them to pay their invoices 30 days after the work is completed.

Both customers have excellent commercial credit and have a track record of paying their invoices on time.

The Problem

Unfortunately, ABC Consulting cannot wait 30 days to get paid. They are a new company that has been growing quickly and don’t have the cash reserves to pay for expenses, while waiting for their customers to pay.

They have to make payroll every week to pay their consultant, and they also have to pay other expenses on a regular basis. For ABC Consulting, waiting for payment creates a serious financial problem.

Unfortunately, ABC is to new a company to qualify for conventional business financing. These leaves them without any banking options.

The Solution

ABC Consulting decides to work with a factoring company, who will finance their invoices from both LARGECO and BIGCO. This will provide ABC with immediate cash flow, which will allow it to pay for business expenses and grow.

Transaction structure

The factor structures the line by financing the invoices in two installments which are called the advance and the rebate. The advance, which covers 85% of the gross value of the invoices is provided as soon as work is completed and the customer receives and invoice. The rebate, which covers the remaining 15% (less the fee), is wired as soon as the customer pays the invoice in full.

Notice of assignment

As soon as ABC signs the contract, the factor begins the customer notification process. They send a notice of assignment to each customer. This document informs LARGECO and BIGCO that the factor will be processing payments on behalf of ABC. The NOA includes a new payment remittance address, which is usually a lockbox.

Invoice Verifications

Factoring companies will often verify an invoice before funding it. They will contact the customer and verify that the services/product was received in accordance to their expectations. They will also verify the amount of the invoice.

Verifications can be done by email, fax or phone.

Transaction structure

Transactions often works as follows:

  1. ABC deliversĀ services
  2. ABC sends invoices to BIGCO and LARGECO
  3. A copy of the invoices is sent to the factor
  4. The factor verifies the invoices
  5. The factor wires the advance – 80% of the invoice
  6. After 30 days, BIGCO and LARGECO pay
  7. The factor wires the rebate, 20% less the fee


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