Invoice factoring is used by companies to free up working capital. It involves the sale of accounts receivable (invoices) to a factoring company. The factoring company collects customer payments, taking the operational hurdle of recovering the funds and the risk of default. This allows businesses to use their invoices as collateral for quick access to cash, without taking out additional loans or other forms of debt.

Factoring companies make money by charging a fee for their services. The fee may be a flat rate or it could be based on a percentage of the invoice amount. As they operate on thin margins, factoring companies must be extremely efficient in their collection operations – but this can be difficult when dealing with multiple markets and payment methods.

In this article, we develop how banking aggregation platforms such as Mambu Payments support factoring companies by centralising and automating all payment operations through a single API and central dashboard. Let’s dive into the workflow.

The factoring company starts by receiving an invoice to be factored from one of its customers. Upon acceptance of the invoice, the factoring company decides to initiate the payment from one of its accounts. In Mambu Payments, connected accounts can be any bank accounts for which the company has a cash management contract with its banking partners. This can for example include payments accounts, operating accounts, or accounts holding collateral for default provision.

Multiple banks can also hold connected accounts in multiple geographies. By changing the connected_account_id in payment, the factoring company can change the originating accounts for its payouts to best fit its treasury and operational needs.

If the customer is new, its banking details are then created in Mambu Payments in a new counterparty account object storing account information as well as any meta relevant for reconciliations.

POST https://api.numeral.io/v1/counterparties

POST https://sandbox.numeral.io/v1/counterparty_accounts

The payment is initiated using the newly created counterparty object by creating a payment order object. By setting the attribute to type=sepa_instant, the payment order will be paid through a SEPA instant credit transfer to provide faster liquidity to the customer.

POST https://api.numeral.io/v1/payment_orders

After its creation, the payment is usually approved before it is sent to the bank. Approvals can take place at the payment order level or at the file level. Mambu Payments automatically batches individual payment orders into ISO 20022 payment files transmitted automatically to the bank.

POST https://api.numeral.io/v1/payment_orders/{id}/approve

POST https://api.numeral.io/v1/files/{id}/approve

Once approved and batched into a payment file, the payment file is transmitted to the bank for processing. Mambu Payments then updates each payment order’s status in real-time whenever the bank shares file updates on its servers. Status updates are streamed back to the company’s own system through webhooks.

With the invoice advance paid out, now comes the hard part for the factoring company: recovering the amount due on payment terms. There are multiple ways for factoring companies to conduct recovery.

In this section, we will focus on two main ones

Creating and assigning a virtual account

Virtual IBANs are key tools provided by banks to automate the incoming payment reconciliation process. In the recovery process, the factoring company associates a virtual IBAN with the debtor company in its systems. All invoices sent to the debtor will request payment to this virtual IBAN. In Mambu Payments, linking the virtual IBAN to the counterparty is done by creating a virtual account linked to the debtor’s counterparty.

POST https://api.numeral.io/v1/virtual_accounts

POST https://api.numeral.io/v1/virtual_accounts/{virtual_account_id}/counterparties/{counterparty_id}/assign

Creating an expected payment to automate reconciliations

Reconciling a transaction with an expected invoice repayment can be a challenging task when thousands of payments are received per day. Mambu Payments supports full incoming payment automation through the use of expected payments. An expected payment is a payment that is not initiated through Mambu Payments, but that you nonetheless want to track and reconcile with a transaction. The expected payment is linked to the virtual account created above.

POST https://api.numeral.io/v1/expected_payments

Reconciling and monitoring expected payments