How Does Factoring Work?

A Step-by-Step Guide to the Factoring Process and Key Considerations

Factoring is an effective financing method used by businesses to convert their receivables from credit sales into cash. However, it’s important to understand that this process involves more than just a “receivables transfer.” Factoring is a professional financial process and must be planned carefully at every step. Here is the step-by-step factoring process:

1. Selecting a Factoring Company

The factoring process begins with choosing the right financial partner.

• Working with a BRSA-licensed and reputable factoring company is crucial for both legal security and transaction quality.

• The company's industry experience, transaction volume, variety of services, and customer references should be thoroughly reviewed.

• If export factoring is to be done, it is essential to check whether the company has international networks and partnerships.

2. Factoring Application

After contacting the factoring company, it will request some essential documents.
During the application phase, the following information is typically required:

• Trade registry gazette

• Tax certificate

• Signature circular

• Current balance sheet and income statement

• Sample invoices issued to customers with outstanding receivables

With these documents, the factoring company assesses both the client’s creditworthiness and the validity of the receivables.

3. Invoice and Receivable Evaluation

The factoring company evaluates the commercial and legal suitability of the receivables to be assigned.
Key criteria during this evaluation include:

• Authenticity of the invoice and whether the goods/services were delivered

• Buyer’s payment history, credit score, and financial condition

• Whether the receivable is assignable

• Invoice due date and associated risk

As a result of this analysis, the company determines which invoices will be accepted and under what financing terms.

4. Signing the Contract and Assignment Notification

The transfer (assignment) of receivables legally takes place through a factoring agreement. This agreement details:

• The scope of the assigned receivables

• The financing percentage to be paid

• Commission and interest rates

• Repayment conditions

• Collection and guarantee responsibilities

After the contract is signed, an assignment notice is sent to the buyer (debtor), officially notifying them that the debt is now payable to the factoring company.

5. Invoice Financing (Advance Payment)

Once the factoring company receives the invoices covered by the contract, it pays a predetermined portion (usually 80–90%) of the invoice amount to the seller in advance.
This payment is called the “advance payment.”
The remaining balance is transferred to the seller after the buyer pays the invoice on the due date, minus commissions and interest charges.

6. Collection Process

The collection is handled by the factoring company.

• The buyer pays the debt directly to the factoring company on the due date.

• The factoring company tracks the payment and, if necessary, initiates legal collection procedures.

• In some types of factoring (e.g., non-recourse factoring), even if the buyer defaults, the seller still receives payment. In such cases, the risk lies with the factoring company.

7. Final Payment and Completion of the Process

Once the buyer makes the payment and it is received by the factoring company:

• Commission, interest, and other charges (if any) are deducted

• The remaining balance is transferred to the seller’s account

Thus, the process is completed.
This cycle can be repeated for each new sale and invoice; hence, companies that use continuous factoring services benefit from a dynamic and sustainable financial flow.

Key Considerations During the Factoring Process

✅ Pay attention to invoice date and due dates. Old, uncollected, or disputed invoices are generally not accepted.
✅ The buyer’s commercial reliability should be high. Risky customers can negatively impact the factoring process.
✅ All transactions must be documented and conducted transparently. This is critical for both legal compliance and customer relations.
✅ Contract terms must be reviewed in detail, especially interest rates, commission fees, and the scope of the assignment.
✅ Only BRSA-licensed factoring companies should be used. Unlicensed firms pose a significant risk of fraud.

Professional Approach, Fast Cash Solution

Factoring is not only a solution for cash flow but also a powerful tool for expanding business volume and managing risk.
Every step of the process should be professionally planned, carried out with reliable financial partners, and executed with full transparency.
With the right factoring strategy for your business, you can leave cash flow issues behind and build a stronger, more sustainable financial structure for your growth journey.