Common Problems When Factoring Invoices

Unlike most business financing solutions, invoice factoring is a hands-on form of financing that requires regular interaction between the factoring provider, the client, and the customer who pays the invoices. Since this type of transaction has a number of “moving parts,” it is not unusual for some invoice factoring transactions to encounter problems.

In this article we will discuss the common issues with factoring invoices so that you can plan ahead and act accordingly if a problem arises.

The Common Issues

The customer is not creditworthy

The most common problem when trying to factor receivables. If your customers is not creditworthy, the invoice is not factorable. The bad news is that there is very little that can be done about this since creditworthiness of the customers is an important factor.

The invoice exceeds the credit line

This problem occurs when the total amount of the invoices that you want to factor exceeds the credit line that the provider has assigned to your company or customer. Review and manage the status of the line proactively so that you can anticipate this problem. The solution is to negotiate a credit line increase.

The invoice cannot be verified

Most factoring companies will verify invoices prior to funding. This allows them to verify that the work has been completed or that the product has been delivered. It also helps ensure that your customers are happy. However, customers can refuse to verify an invoice at their discretion. And if they do, your provider may not factor that invoice. The only solution is to try to negotiate with your customer and enlist their cooperation.

The customer refuses to submit payment to the factoring company

As part of the financing process, your customer must submit the invoice payment directly to the factoring company. This process is usually outlined in the notice of assignment letter that is sent to them. For whatever reason, your customer could refuse to send the payment to the factor. This situation can be very problematic and could prevent you from financing the invoices associated with that customer. Seek guidance from your factoring company and legal counsel. You want to be careful not to upset your customers and risk losing them over this issue.

The work is not complete / the product is not delivered

When factoring invoices, this is the most common problem. The client will try to factor an invoice for which the service has not been completed or the product has not been fully delivered. This invoice will be factorable until the work is completed, or the product is delivered. Factoring companies can only purchase invoice for completed services.

The Bottom Line

Factoring is easier to access than other forms of financing especially for those businesses that are new, but it does end up costing you a lot more. This type of financing is not always the best method for long term finance needs and is more suited to securing quick financing to cover cash needs that are immediate. It is wise to investigate other financing options if your business has long-term financing needs for growth and expansion, such as small business loans.