Common Problems When Factoring Invoices

Invoice factoring is commonly used by small and midsized businesses to improve their cash flow. Companies get funds by sending regular funding requests to the finance company. This article covers seven problems that can affect funding requests. It explains what causes the problem, discusses possible solutions, and describes how to avoid the situation in the future.

1. The funding request is missing information

Clients request advances from their factoring companies by submitting a schedule of accounts through the factor’s online portal. The schedule of accounts contains the invoices you want to finance and any backup documentation. The most common reason transactions are delayed is that a schedule of accounts is missing information. This problem is easily prevented by reviewing submissions before sending them to the finance company. For more information, read “How Does Invoice Factoring Work?

2. The customer is not creditworthy

Factoring companies check the business credit of any new customer whose invoices you want to finance. The factor can only finance invoices from companies that meet their funding criteria. A customer’s invoice may not meet the factor’s funding criteria for two reasons.

In some cases, your customer’s credit report does not have enough information to make a decision. This situation can happen if your customer is a small business with limited trade lines. Having insufficient information on a credit report does not mean that your customer has bad business credit. Rather, it means that the factor does not have enough information to decide.

Another possibility is that your customer’s credit report may not justify the amount you want to finance. This scenario can occur if your request is large relative to your customer’s size or if their profile has negative indicators.

You can’t do anything to solve this problem. However, the factor’s unwillingness to buy those invoices indicates that you may want to reconsider providing terms to the customer.

3. The invoice exceeds the credit line

Most factoring companies set up your account with a maximum credit line. This amount indicates the total value of the invoices the factor is willing to purchase. Additionally, each of your customers has an individual maximum credit amount. This figure indicates the total value of the invoices the factor is willing to purchase for that specific customer. Your factoring company should let you know this information in advance.

A factoring company won’t be able to finance your invoice if you have reached your credit limit or if it exceeds your customer’s maximum amount. The simplest way to solve this problem is to request that the factoring company consider increasing your limits.

4. The invoice can’t be verified

Factoring companies verify invoices before they are funded. A factoring company won’t be able to finance the invoice if it cannot be verified. The only way to solve this problem is to work with the factoring company and determine why the invoice can’t be verified. Often, the problem is simple. Common problems include:

  • Invoice not posted on vendor portal
  • Invoice status not updated on vendor portal
  • Discrepancies between the invoice and the order

5. Customer is unwilling to submit payment to the factoring company

Your customers must remit their payments to the factoring company. This step is outlined in their Notice of Assignment and is essential to the factoring process. Some customers may object to remitting payment to the factor even though the invoice has been sold. This objection does not happen often, but it should be handled tactfully. The only way to proceed is to develop a plan with your factoring company to manage this situation.

6. The invoice is only partially fulfilled

Factoring companies can only finance invoices that have been fulfilled. The work and/or product must be completed and delivered to your customer. Unfortunately, there are no exceptions to this rule. A factoring company won’t be able to finance an invoice if all the work or the product described in it has not been delivered.

7. Pre-billing

Pre-billing occurs when a client sends an invoice to their customer before any work/product is delivered. Factoring companies cannot finance these invoices, as it is similar to what we described in issue #6.

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