Why Factoring Providers Confirm Customer Invoices

Invoice factoring is a great way for a company to produce working capital, especially if they don't qualify for a bank line of credit. Although there is less paperwork and an account is easier to set up than traditionalistic financing, factors are very intense about substantiating the correctness of invoices.

In a typical accounts receivable factoring relationship, the only security required is a pledge of the company's receivables. These are amounts payable from customers on goods sold or services performed. Depending on several factors, such as the type of industry the client participates in, the credit-worthiness of its patrons, and the reliability of the business's billing and collections process, the advance amount on invoices given in to the factoring business can range from 65% to 85%. The remaining amount is labelled the reserve and offers a cushion to the factor.

Why factoring companies examine invoices:

Since the factoring provider's security is directly related to the amounts billed on credit, they will frequently contact the customers directly to test the invoices. They will not only affirm the invoice totals, but equally as important, make sure the client is satisfied both in terms of completeness and quality.

Many businesses request factoring for a product or service that has yet to be provided in order to reinforce their cash flow. Even though they have invoiced the customer, the work won't be done until later and the client needs to shore up their cash flow. A company with this scenario isn't a candidate for factoring because the customer can demand their money back if the service isn't accomplished. This is considered pre-billing.

Another situation that doesn't fall into the model of factoring is progress claims. This usually relates to a construction project in which the company bills the customer on a periodic basis until the project is completed. Because there is no milestone of completion, the factoring company is unable to advance funds on the invoice. To do so would greatly magnify the risk to the factor. Another difficulty is related to the warranty directly bound to the sale. If the customer is not happy with the goods or services sold, performance is called into question and there could be offsets against the invoice.

In other words, not only do factoring providers require the work to be completed, they also seek to verify the satisfaction of the client. Ongoing difficulties of this nature will likely result in a termination of funding. Factoring can significantly improve the cash flow of an organization, but business proprietors and decision makers must understand the position of the factoring entity they are working with. There will not likely be a challenge if the goods or services sold are of good quality and credit is extended prudentially.