The Mechanics of Factoring Pt 1

Many small business owners ask, “How does factoring work exactly?” Here is the step by step process.
First the factoring company must do a credit check on the account debtor (the customer who will pay the invoice.) The critical issue is, you may be doing actual work for company A which is a very large corporation, but you are doing this work in the capacity as a sub-contractor – so the customer is actually company B, and they need to have good credit. Whoever is paying the invoice, that company needs to have the credit history necessary to finance your invoice.
The factoring company uses public information such as Public Filings and third party credit reports to determine creditworthiness. At this point in the transaction the factor is not contacting the customer directly.
The benefit for the factoring client is they get to check the credit of a potential customer before starting to do business with them. This allows our clients to know ahead of time whether they should be extending credit to a particular account debtor. The customer might also get a credit limit, so you might only finance invoices up to a dollar amount limit.