Pre-settlement

Understanding Pre-settlement in Financial Factoring

When a business enters the world of financial factoring, it may encounter the term pre-settlement. This is a critical stage in the factoring process. Factoring is a financial tool that allows businesses to sell their invoices to a third party, called a factor, for immediate cash. Pre-settlement refers to the period before the factor releases funds to the business selling its invoices.

The Pre-settlement Process

In pre-settlement, the factor conducts due diligence. This means they will verify the invoices submitted for factoring. They check to ensure that the invoices are valid, that the goods or services have been delivered as promised, and that the customers are likely to pay. After approval, the factor will advance a percentage of the invoice value to the business. This is typically between 70% to 90%.

The Importance of Pre-settlement

Pre-settlement is vital because it serves as a protective measure for both the business and the factor. It is during this phase that any issues with the invoices can be spotted and resolved. Pre-settlement assessments help reduce the risk of non-payment or disputes that can affect the final settlement.

What Businesses Should Know

Businesses considering financial factoring as a cash flow solution should understand all stages, especially pre-settlement. Keeping records accurate and clients credible is important because it will impact the pre-settlement review. Being prepared can speed up the pre-settlement process, leading to quicker access to funding.

Pre-settlement Expectations

During pre-settlement, businesses can expect some back and forth with the factor. There may be requests for additional information or clarification regarding the invoices. While the pre-settlement phase typically takes a few days, it can be longer if there are issues or if the factor is handling a high volume of transactions.

Conclusion

Pre-settlement is a key component in the sequence of financial factoring. It safeguards the interests of all parties involved by ensuring invoices are legitimate and payable. While it may add time before funds are received, pre-settlement offers assurance that once the money is advanced, the deal stands on firm ground.