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.
This article identifies some common problems with factoring invoices so that you can plan ahead and act accordingly if a problem arises. Here are the top 5 issues:
1. The customer is not creditworthy
This is the most common problem when trying to factor receivables. If your customer is not creditworthy, the invoice isn’t factorable. Unfortunately, there is little that can be done about this since the creditworthiness of your customers is the cornerstone of factoring.
2. The invoice exceeds the credit line
This common 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 your customer. It’s always a good idea to review and manage the status of the line proactively so that you can anticipate this problem. The solution is to try to negotiate a credit line increase.
3. The invoice can’t be verified
Most factoring companies will verify invoices prior to funding. This step allows them to verify that the work has been completed satisfactorily – or that the product has been delivered in accordance with the purchase order. It also helps you ensure that your clients 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.
4. 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. If this happens, seek guidance from your factoring company and from legal counsel. You want to be careful not to upset your customer and risk losing them over this issue.
5. The work is not complete / the product is not delivered
This is the most common problem when factoring invoices. Usually the client tries to factor an invoice for which the service has not been completed or the product has not been fully delivered. This invoice will be unfactorable until the work is completed or the product is delivered. Factoring companies can only purchase invoice for completed services.
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