One of the chief objections that clients have with using factoring to finance their businesses is that their customers will need to remit payments to a new address, and usually in the name of the factoring company. Actually, notifying the customer of the new payment procedure is an important part of the notice of assignment. But why is this needed?
The most common way to finance an invoice is to sell it to a factoring (finance) company. The finance company pays you for your invoice upfront, while securing the financial rights to the invoice as collateral. Since they now own the financial rights to the invoice, obviously they want to be the ones to process its payment. For many finance companies, this is a non-negotiable point.
Different ways to collect
There are, however, many ways that a finance company can collect on an invoice. Different companies offer different methods, and some methods are more customer-friendly than others. Most factoring companies use a bank lockbox to process payments. A lockbox is a service that allows banks to process payments and post them to an account the same day that they are received.
Many lockbox services also scan documents that are received and make them available online. As you can imagine, lockbox services are very helpful in the finance process.
Here are the four most common ways of handling a payment. Note that not every company offers every option. The options listed here assume that your finance company uses a lockbox.
1. Payment made in factoring company’s name
In this type of processing, your customer has to send the payment to the factor’s lockbox, and the checks have to be made to the name of the finance company. While this method of payment processing works fine, it tends to raise the most concerns among customers, who may feel uncomfortable that their vendor is not listed on the check.
2. Payment made in factoring company’s name FBO (“For Benefit of”) client
This is the most common payment processing method in the industry. In this case, your customer still sends a payment to the factor’s lockbox, but the check is payable to the finance company FBO your company. So the check could read: “Some Factor Inc. FBO Client Inc.” This approach makes it clear that, while the check is being sent to the factoring company, the payment is intended to benefit the client’s account.
3. Payment made in client’s name
Some finance companies have agreements that allow your customer to send a check made payable to your company, as long as the check is sent to the factor’s lockbox. These agreements are less common in the industry, but some finance companies do allow these types of payments. From a client’s perspective, this method is the best because it limits the factor’s visibility in the payment process.
4. Payment made in client’s name – separate lockbox
Because this last option is more expensive, it is used by some companies on larger accounts. In this case, the factor arranges for a specific bank lockbox for your company only. The lockbox is set up to deposit funds to the factor’s account. Your customers send payments to this lockbox using your company’s name, and the payments then flow to the factor’s account. These separate-lockbox setups usually have a monthly maintenance fee of a few hundred dollars.
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