Is invoice factoring a good solution for companies with collections problems? It depends on what type of collections problems your company is having. If your customers have good commercial credit but are taking longer to pay, then factoring might be be a good solution for your company. On the other hand, if your customers have credit problems and are not paying on time (or at all), then factoring is not a good solution for your business.
Understanding slow payments
Let’s look at this situation in more detail. Companies with good commercial credit take 30 to 60 days, on average, to pay invoices. They pay on these terms because it helps their cash flow. However, the main reason they pay on these terms is because they can.
Since these companies have good credit, other companies want to do business with them and are willing to offer payment terms. However, many suppliers to these companies encounter problems because they can’t afford to wait up to 60 days to get paid, and they seek a solution through invoice factoring. Obviously, invoices from these companies tend to be good candidates for invoice factoring.
Credit problems are different
On the other hand, some companies with serious cash flow problems pay late simply because they don’t have the money to pay sooner. In fact, many of these companies may not pay their invoices in full (or at all). Although many companies may be tempted to factor these invoices, it usually a bad idea because most factoring companies buy invoices with a 90-day sale-back clause — allowing the factor to sell the invoice back to your company if it is not paid within 90 days.
Clearly, selling a problem invoice to a factoring company, only to have to buy it back 90 days later, won’t help you.
If your company has collections problems due to customers with bad commercial credit, consider working with an attorney specializing in collections.
Also, consider reading “The Best Way of Collecting Unpaid Invoices” and “How to Offer Net-30-day Terms with Confidence“, which could help minimize your chances of doing business with customers that have bad commercial credit.
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