Risks of which Factors and Invoice Discounters Must Be Wary
On the factor or invoice discounter’s part, they face a few risks against which they must protect themselves. Some payments just do not come in. Sometimes there are scam invoices to which they must be alert. Factors usually make sure that adequate measures are taken to ensure that the business they are helping and the customers from whom they must collect the payment do not dupe them.
Common risks include purchasing invoices that are not genuine, and businesses intercepting and depositing cheques that should rightfully go to the factor. Let us look at each of these in turn:
You will usually see a clause in your factoring agreement, which states that only genuine and clear invoices can be sold. This means that the invoice must contain the correct details regarding the product, customer, and amount due. You cannot submit fictitious invoices. Information that is mentioned on the invoice must be correct and, on verification, must be shown to be genuine. In addition, you must also declare that there is no money owed by you to your customers and, therefore, no money will be held back when the factor collects the payment from your customers. Therefore, the invoice amount is the amount the factor can collect.
Naturally, factors will make sure that they take the necessary steps to see that the invoices are valid. Much of business is based on trust. A factoring relationship is no different. In fact, considering that the factor is instrumental in helping you get working capital that you can use to develop your business, it is not surprising that trust is an important ingredient in your relationship.
If you intentionally sell invoices that are false, it is a sure-fire way to wreck the relationship. Therefore, honesty is the best policy to ensure that you enjoy all the benefits of factoring. Accurate invoices help businesses grow. Offering false invoices knowingly is a criminal offence and the business can be legally penalized for this.
Cashing a Customer Cheque That is Rightfully the Factor’s
This might sound odd, but there are business owners who will actually receive the customer cheques against the factored invoices and deposit them into their own account. Therefore, the factor does not receive it. Sometimes, this can happen by oversight when an employee unintentionally deposits the check without being aware of the factor account. In any case, this is not correct. There are business owners that try to justify themselves, saying that they needed the money urgently and intended to make the payment to the factor. Whatever the reason, things like these can spoil the trust in the relationship and can occasionally result in penalties.
A Symbiotic Relationship
It is important to understand that factors and businesses work as a partnership, because the factor arranges the funds for the business’ growth, enabling the business to become more profitable. Apart from this, factors perform a host of services that allow you, the business owner, to focus on business development, while they perform the mundane tasks of payment follow-ups, account receivables management (in a full service agreement), credit checks on customers, and so on. As your business grows along with your profits, so do your accounts receivables, and the factor also increases its income.
The relationship of a business with its factor must be harmonious and symbiotic – mutually beneficial. However, some relationships can turn bad due to various reasons. Apart from the reasons described earlier, situations can arise where the factor may be unaware of past disputes between the business and its customers, products that are not up to the quality mark, or, worse yet, a customer becoming insolvent. At such times, it is vital to work it out together, with the factor’s support, so that the issues may be resolved. Since the factor has arranged the money based on the belief that everything is above board, it becomes the business’ responsibility to cooperate and find a solution.